a fair share for australian manufacturing · 2020. 8. 26. · a fair share for australian...
TRANSCRIPT
A Fair Share for Australian Manufacturing 1
A Fair Share for Australian Manufacturing: Manufacturing Renewal for the
Post-COVID Economy
By Dr. Jim Stanford
The Centre for Future Work at the Australia Institute
July 2020
A Fair Share for Australian Manufacturing 2
About The Australia Institute
The Australia Institute is an independent public policy think
tank based in Canberra. It is funded by donations from
philanthropic trusts and individuals and commissioned
research. We barrack for ideas, not political parties or
candidates. Since its launch in 1994, the Institute has carried
out highly influential research on a broad range of economic,
social and environmental issues.
Our Philosophy
As we begin the 21st century, new dilemmas confront our
society and our planet. Unprecedented levels of consumption
co-exist with extreme poverty. Through new technology we are
more connected than we have ever been, yet civic engagement
is declining. Environmental neglect continues despite
heightened ecological awareness. A better balance is urgently
needed.
The Australia Institute’s directors, staff and supporters
represent a broad range of views and priorities. What unites us
is a belief that through a combination of research and creativity
we can promote new solutions and ways of thinking.
Our Purpose – ‘Research That Matters’
The Institute publishes research that contributes to a more
just, sustainable and peaceful society. Our goal is to gather,
interpret and communicate evidence in order to both diagnose
the problems we face and propose new solutions to tackle
them.
The Institute is wholly independent and not affiliated with any
other organisation. Donations to its Research Fund are tax
deductible for the donor. Anyone wishing to donate can do so
via the website at https://www.tai.org.au or by calling the
Institute on 02 6130 0530. Our secure and user-friendly
website allows donors to make either one-off or regular
monthly donations and we encourage everyone who can to
donate in this way as it assists our research in the most
significant manner.
Level 1, Endeavour House, 1 Franklin St
Canberra, ACT 2601
Tel: (02) 61300530
Email: [email protected] Website: www.tai.org.au
About the Centre for Future Work
The Centre for Future Work is a research centre, housed within
the Australia Institute, to conduct and publish progressive
economic research on work, employment, and labour markets.
It serves as a unique centre of excellence on the economic
issues facing working people: including the future of jobs,
wages and income distribution, skills and training, sector and
industry policies, globalisation, the role of government, public
services, and more. The Centre also develops timely and
practical policy proposals to help make the world of work
better for working people and their families.
www.futurework.org.au
About the Author
Jim Stanford is Economist and Director of the Centre for Future
Work. He holds a PhD in Economics from the New School for
Social Research, and an MPhil from the University of
Cambridge. He is also Honorary Professor of Political-Economy
at the University of Sydney.
The author thanks Dan Nahum, Nixon Apple, and David
Richardson for helpful input.
This report was commissioned by the Australian Manufacturing
Workers Union.
A Fair Share for Australian Manufacturing 3
Table of Contents
Introduction: A New Opportunity.................................................................................. 4
Why Manufacturing Matters ......................................................................................... 8
Taking Stock: Battered but Resilient ............................................................................ 14
Australia’s Place in the World ..................................................................................... 25
Making the Most of Our Minerals: Adding Value ......................................................... 38
Making the Most of Our People: Skills and Training .................................................... 44
Making the Most of Our Energy: A New Industrial Synergy ......................................... 49
Making the Most of Our Firms: Size and Capacity ....................................................... 57
A ‘Fair Share’ for Manufacturing Renewal ................................................................... 60
Principles for Modern Industry Policy.......................................................................... 66
Action Plan: Six Immediate Priorities for Industrial Rejuvenation ................................ 72
Conclusion .................................................................................................................. 75
References .................................................................................................................. 77
A Fair Share for Australian Manufacturing 4
Introduction: A New Opportunity
Since the COVID-19 crisis emerged, Australians have been starkly reminded of the
importance of being able to manufacture goods domestically. International shortages
of medical equipment and personal protective equipment, exacerbated by restrictions
on exports imposed by some governments (including the U.S.), created concern that
Australia might not have access to essential supplies. Australia’s government and
manufacturers scrambled to convert domestic facilities to try to produce essential
medical equipment and supplies. Even supplying simple products like masks proved to
be a challenge for our economy. While thankfully critical shortages did not emerge
(thanks mostly to Australia’s success in ‘flattening the curve’), the crisis reminded
Australians that being able to domestically produce a full range of essential
manufactures is a matter of national wellbeing. Similar concerns about domestic
manufacturing capability for strategic equipment (such as defence products) have also
motivated renewed concern about the erosion of Australia’s national capacity to ‘make
stuff.’
For many years the conventional economic wisdom was that as a high-wage, resource-
rich economy, Australia was unable to competitively manufacture — nor did it need to.
Between digging up raw materials and shipping them to our trading partners (who
subsequently manufactured those resources into higher-value products which they
sold to us … at a premium) and our success in some service exports (such as higher
education for foreign students), it was argued we no longer needed to produce the
material things we use. The COVID-19 pandemic has shattered that complacency. Even
senior government officials, who long trumpeted the virtues of free trade and so-called
‘comparative advantage’ specialisation, now concede that Australia’s domestic
manufacturing capability has declined too far.1 And government bodies (including the
National COVID-19 Coordination Commission, or NCCC) are investigating opportunities
for revitalising manufacturing as part of Australia’s post-pandemic economic
reconstruction.
It’s true the extraction of our extraordinary mineral endowment made some
Australians wealthy, but in a very lopsided way. Our precarious national reliance on
resource extraction, combined with the long decline of manufacturing (which
traditionally offered decent employment opportunities for working class Australians),
has made Australia a far more unequal society. It has also put us continually at the
mercy of boom-and-bust cycles in global demand for resources, and undermined our
1 See, for example, Sas (2020).
A Fair Share for Australian Manufacturing 5
national progress toward decarbonisation and meeting greenhouse gas reduction
commitments.
Manufacturing is not just ‘another’ sector of our national economy. For several
concrete reasons, manufacturing carries a strategic importance to our broader
economy, society and security.
• Australians purchase and use more manufactured goods over time; and
manufacturing output is growing around the world. Allowing domestic
manufacturing to decline, while our use of manufactured products grows,
undermines our national economic potential.
• Manufacturing is the most innovation-intensive sector in the whole economy. No
country can be an innovation leader without manufacturing.
• Manufactured goods account for over two-thirds of world merchandise trade. A
country that cannot successfully export manufactures will be shut out of most
trade.
• Manufacturing anchors hundreds of thousands of other jobs throughout the
economy, thanks to its long and complex supply chain. Billions of dollars’ worth of
supplies and inputs are purchased by manufacturing facilities, which support many
other sectors of the economy.
• Manufacturing offers relatively high-quality jobs, more likely to provide full-time
hours and above-average incomes. And thanks to strong productivity growth and
the capacity to apply modern technology, manufacturing offers the prospect of
rising incomes in the future.
For decades, Australian policy-makers seemed to take manufacturing for granted.
Dazzled by the appealing but temporary riches of a resource boom, many concluded
Australia did not need manufacturing. Now, however, the strategic importance of
manufacturing has become more obvious. A secure and resilient society needs the
capacity to produce a broad range of manufactured products. Australian workers and
businesses clearly possess the knowledge and skills to do that: but we have
mismanaged our economy and undermined the viability of a manufacturing sector that
could put those talents to work.
For several reasons, this is an opportune moment to launch a new, multi-faceted effort
to revitalise Australian manufacturing:
• There is new public awareness of the importance of domestic manufacturing
capability.
A Fair Share for Australian Manufacturing 6
• Previous global supply chains have been disrupted by health measures, trade policy
interventions, and other factors, forcing us to re-learn how to produce more things
at home.
• The depth and speed of the economic contraction associated with the COVID-19
pandemic requires an ambitious strategy to rebuild national production and
employment after the health emergency, and manufacturing could play a central
role in that effort.
• Global economic adjustments, including declines in resource prices and the
exchange value of the Australian currency, have enhanced the cost-
competitiveness of Australian manufacturing.
• A continuing revolution in the technology and economics of energy is creating a
new source of competitive advantage for Australian manufacturing: namely, our
abundant resources of renewable energy, unmatched in the industrialised world.
In short, the prospects for revitalising domestic manufacturing are brighter right now,
than at any time in recent decades. We need a stronger manufacturing sector, for the
well-being of our economy, and the security of our society. This paper will discuss the
reasons why manufacturing carries such a disproportionate strategic importance to
our overall prosperity. It will provide a profile of the industry’s current status,
highlighting the unnaturally small size of our value-added industries. It will discuss in
more detail several factors that have shaped Australia’s recent manufacturing
performance: including the nature of our international trade engagements, the poor
state of our vocational training system, and the new developments in energy that are
altering traditional cost models. The paper will then describe the broad principles of
active industry policy, and the specific ways in which those policies could be applied to
deliver immediate benefits to Australian manufacturing.
The overarching goal of a strategy to revitalise Australian manufacturing should be to
ensure that Australia can maintain a footprint in this strategic sector that is broadly
proportionate to our growing demand for manufactured products. We define this goal
as a ‘Fair Share Manufacturing Strategy.’ If Australia were to produce as much
manufactured output as we consume (just like most other industrial countries do),2
this would drive welcome and substantial growth and benefits in all areas of our
national economy, including:
2 As discussed below, this does not imply Australia must produce everything we use; extensive two-way
trade in manufactured products would still be critical for facilitating mutual specialization and
efficiency. But in aggregate terms, Australian manufacturing would expand to a similar proportion to
the scale of our consumption of manufactured products.
A Fair Share for Australian Manufacturing 7
• $180 billion per year in new manufacturing output
• $50 billion per year in new manufacturing value-added
• Over 400,000 new direct jobs in manufacturing
• $115 billion in new purchases from suppliers in other industries
• 265,000 new jobs throughout the manufacturing supply chain
• At least $40 billion per year in additional manufactured exports
• Tens of billions of dollars in additional tax revenue for governments at all levels
It is an ambitious, long-term goal, to be sure, to return to a situation where Australia
produces an equivalent amount of manufactured products to what we consume. But it
is very reasonable for Australians to expect that we should be able to share
proportionately in the benefits of this most innovation-intensive sector in the global
economy. And government possesses powerful policy tools and levers to begin to
move us toward that ‘fair share.’ The biggest question is whether our leaders have the
political will and imagination to seize the opportunity presented by the current
moment, and start the process of revitalising our domestic value-added industrial
base.
A Fair Share for Australian Manufacturing 8
Why Manufacturing Matters3
Broadly defined, manufacturing simply refers to the transformation of some tangible,
material product, initially harvested from the natural environment (or potentially
recycled from previous uses), into something more complex and useful. With this
broad conception in mind, it is impossible to imagine an economy without
manufacturing: human beings will always have material needs and wants that can only
be met through the production and transformation of material goods. In this regard,
notions about the rise of a ‘post-industrial economy’ or an ‘information economy’ are
superficial and misleading. While services may increase as a share of total
consumption and employment, and information becomes more omnipresent as an
input to other types of production (but rarely is produced for its own inherent value),
manufacturing remains essential to every aspect of our lives. And the distinction
between services and manufacturing is often blurry, anyway: many services (from
computer programming to logistics to motor vehicle repair shops) are focused on
supporting or servicing the production and use of manufactured goods.
Figure 1. The Economic Supply Chain
Manufactured products are essential for the extraction and harvesting of primary
resources. And they are also vital to the production of all services. In short, there is no
3 This section draws on and updates material in Stanford (2016).
A Fair Share for Australian Manufacturing 9
job in society that can be performed without the use of manufactured goods.
Manufacturing provides us with buildings to live and work in, clothes to wear, food to
eat, vehicles to get around in, information networks to learn from, equipment to be
entertained with – and all the other tangible products essential to modern life.
At the same time, the production of tangible manufactured products depends on a
whole range of other inputs and activities, which add value to the overall chain of
production. Manufacturing depends on initial work to collect or harvest the necessary
raw materials from nature (in primary industries, such as agriculture, forestry or
mining). Manufacturing also requires inputs of services (also called ‘tertiary’
production), to ensure that manufactured products are useful and workable –
including tasks such as engineering and design, transportation, logistics, retail,
business, and repair services. But there is no doubt that manufacturing (secondary
production) is inherently an essential and strategic link in the chain of all value-added
activity (see Figure 1).
To be sure, thanks to digital technology, communications capacities, automation,
artificial intelligence and other revolutionary developments, the nature of
manufacturing work is changing. A larger share of work is performed indirectly, rather
than in direct, hands-on production processes: including jobs in planning, engineering,
programming, and maintenance. But this does not imply that the work associated with
transforming materials into more useful end products disappears – only that it is done
differently. Changes in the organization of work, business models, and technology
have also affected the process of manufacturing, and even how we measure it. But
they haven’t eliminated the need for manufacturing.
For example, many service functions that used to be performed in-house by major
manufacturers (ranging from accounting to cleaning) are now commonly outsourced
to independent providers. As a result, the jobs associated with those functions are no
longer defined as ‘manufacturing’ jobs. Instead, they show up in ABS statistics as
‘services’ jobs – including people working for contracted suppliers or labour hire firms.
Around one-third of the total value of final manufacturing products in developed
countries can be accounted for by services inputs,4 and manufacturing constitutes an
important market for the services sector (especially higher-productivity business
services). Indeed, Australian manufacturers purchased over $70 billion worth of
domestic services in 2016-17.5 So the boundary line between manufacturing and
services is very fuzzy indeed.
4 See Lanz and Maurer (2015) for more details. 5 Author’s calculations from ABS Catalogue 5209.0.55.001; the size and composition of input purchases
by Australian manufacturers is discussed in further detail below.
A Fair Share for Australian Manufacturing 10
As economies develop over time, it is normal that manufacturing declines as a relative
share of total value-added activity, and total employment, for a number of complex
reasons. But there is no reason to expect manufacturing to decline in absolute terms:
that is, to actually shrink. To the contrary, manufacturing should normally grow (along
with incomes and population). As income levels rise consumers tend to spend a larger
proportion of additional income on services (including private services, like
transportation and restaurant meals, and public services, like education and health
care). This partly explains why manufacturing shrinks gradually as a relative share of
total output. Furthermore, since productivity growth in manufacturing tends to be
higher than in other sectors, manufacturing products become cheaper over time
(compared to services). Thus manufactured products make up a smaller share of total
expenditure. But neither of these factors imply that manufacturing must inevitably
contract – only that it will likely grow more slowly than other sectors as an economy
advances. Something much worse than this has happened in Australia: our
manufacturing industry has been shrinking in absolute terms, even as our overall
economy (and our own purchases of manufactured goods) continue to grow.
Therefore, the common assumption that a shrinking manufacturing sector doesn’t
matter to national economic well-being is quite wrong. And in addition to its
continued importance in quantitative terms (measured by real output, employment,
and expenditure which should grow over time, not shrink), there are several concrete
features of manufacturing that give it a strategic economic importance far out of
proportion to its absolute size. In other words, there are many qualitative and
structural reasons why ‘manufacturing matters’:
Innovation: There is a crucial structural link between manufacturing and innovation,
which explains why manufacturing is the most innovation-intensive part of the
economy – and why most innovation is inevitably manufacturing-oriented. First, the
manipulation and transformation of material objects is a task that is especially
amenable to technological improvement, mechanisation, and other forms of
innovation. Therefore, no other sector of the economy utilizes as much innovation,
technology, robotics, and other advanced knowledge as manufacturing. Many services
jobs are much harder to automate than goods production. And even when
innovations are applied to services production, they almost always require the use of
new machinery and equipment – which, of course, are themselves manufactured
products. For both reasons, countries which succeed in manufacturing are also more
likely to be successful innovators. For example, there are eight OECD countries which
allocate over 3 percent of their GDP to research and development (twice or more of
Australia’s R&D expenditure share), and all of them are successful export-oriented
A Fair Share for Australian Manufacturing 11
manufacturing nations: Israel, Korea, Switzerland, Sweden, Japan, Austria, Germany
and Denmark.6
Within Australia, the importance of manufacturing to national innovation performance
is also readily apparent. Despite recent challenges, manufacturing allocates more of
its income to innovation than any other industry: manufacturers spent $4.6 billion on
research and development in 2017-18 (most recent data), equal to over 4% of the
sector’s total value-added. The share of GDP invested by manufacturing in R&D is four
times the economy-wide average. The decline of manufacturing in Australia has thus
been a major reason for Australia’s flagging innovation performance. Overall,
Australian businesses invested less in R&D in current dollar terms in 2017-18 than they
did in 2010-11 – and their R&D investments declined by one-quarter as a share of
GDP.7 If this most innovation-intensive sector of the economy contracts, it is inevitable
that overall innovation activity deteriorates. At a time when innovation and advanced
technology are increasingly critical determinants of national competitiveness, the
deterioration of Australia’s innovation effort – tied to the contraction in manufacturing
– is a huge disadvantage.
Productivity: Thanks to greater potential for applying automation, technology, and
other forms of innovation in manufacturing production, manufacturing tends to
demonstrate higher ongoing rates of productivity growth than other parts of the
economy. This has been true historically in Australia, with manufacturing productivity
growth exceeding economy-wide rates in earlier decades when manufacturing was
developing and expanding. More recently, manufacturing productivity performance
would have been even stronger if the industry were growing, rather than shrinking.
Moreover, strong manufacturing productivity growth can spill over into stronger
national productivity performance via several channels: by a simple composition effect
(lifting the average of all sectors, especially if manufacturing itself is growing), by
contributing to stronger exports (thanks to greater competitiveness), and by
pioneering productivity-improving technology and machinery that can also be applied
to boost productivity in other sectors (including services industries). New vistas in
technology and automation hold out great prospect of accelerating productivity
growth and quality standards in manufacturing. These include:
• automation and robotics
• applications of artificial intelligence in manufacturing
6 Listed in descending order of R&D spending relative to GDP; from OECD data, “Gross domestic
spending on R&D”. 7 Author’s calculations from ABS Catalogues 5206.0 and 8104.0.
A Fair Share for Australian Manufacturing 12
• ‘Industry 4.0’ systems, which rely on digital information connections between all
segments of a manufacturers’ operations to enhance efficiency.
Australia needs a vibrant, expanding, and well-capitalised manufacturing industry to
take advantage of these important developments.
Incomes: Higher productivity and faster productivity growth create a sustainable
economic foundation for high and growing incomes. Average incomes in
manufacturing (especially those sub-sectors which are especially reliant on new
technology, skill, and export markets) are superior to other jobs. On the other hand,
the loss of full-time, high-wage jobs in Australian manufacturing in recent years has
clearly contributed to the unprecedented slowdown in national wage growth, the loss
of decent working class jobs, and the polarisaton of incomes and economic
opportunity.
International trade: International trade allows countries to specialize in different
varieties of manufactured goods. This allows them to capture the strong efficiency
benefits that come with producing at greater scale – so long, of course, as each
country retains a fair share of overall manufacturing output in the end.
(Unfortunately, as we will discuss below, this condition does not apply to Australia’s
international trade in manufactures, which has been very lopsided and produced a
large and chronic trade deficit.) The efficiency benefits of producing at scale, along
with the physical properties of most manufactures (they are tangible, durable, and
transportable), explain why manufacturing remains the dominant component of
international trade. Manufactured products accounted for over 70% of global
merchandise trade in 2018, with manufacturing trade worth a total of $14 trillion
(U.S.).8 And the dominance of manufactures in total trade has grown in recent years.
On this score, too, despite recent challenges, Australian manufacturers still make a
disproportionate contribution to national trade performance. Manufactured products
accounted for around $95 billion in export sales in 2019, or almost 25% of total
Australian merchandise exports.9 Manufacturing’s share of total exports is thus more
than 4 times larger than its modest 5.5% share of national GDP.
The orientation of manufacturing to export markets creates several spillover benefits
for the rest of the economy. A larger manufacturing sector automatically boosts
exports (and therefore translates into a stronger balance of payments). A better
structural capacity to export can also underpin stronger overall GDP growth, ensuring
that a country (as it grows) earns enough export revenues to cover rising import
8 Author’s calculations from World Trade Organization data portal, “Merchandise imports by product
group.” 9 Author’s calculations from DFTA TRIEC trade.
A Fair Share for Australian Manufacturing 13
costs.10 Economic evidence also indicates that export-oriented industries demonstrate
higher productivity growth and higher average incomes, because of the discipline
imposed in competing for foreign customers.
Supply chains and multipliers: Another channel through which a strong manufacturing
presence translates into broader economic activity and employment is through its
impact on domestic supply chains. Most manufacturers rely disproportionately on
inputs of all kinds (primary, secondary, and tertiary) purchased from outside
companies. Those parts, materials and supplies (called ‘intermediate purchases’)
totaled $260 billion in 2016-17, according to the input-output tables published by the
Australian Bureau of Statistics.11 As business models have become more sophisticated
and specialised, supply chains have become more complex and interconnected. But
they still rely on the domestic presence of a key manufacturing customer to act as an
economic ‘anchor’, thus stabilising the whole supply chain. These supply chain
relationships explain why, when a major manufacturing facility opens (or,
unfortunately, closes), the impact on regional and national labor markets is magnified.
Jobs in supply industries (some of which may be several steps removed from the final
manufacturing customer) are also ultimately affected. These ‘multiplier effects’ are
especially strong in manufacturing (and much higher than in other sectors) because of
manufacturing’s more developed and complex supply chain.
* * * * *
These are all concrete, economic reasons why the importance of manufacturing to the
national economy is larger than implied by simple production or employment shares. A
successful, vibrant, domestic manufacturing sector generates important spillovers that
strengthen other parts of the economy, and contribute disproportionately to national
performance in innovation, international trade, and productivity. In calling for a
revitalisation of manufacturing, to a size proportionate to Australia’s collective needs
for manufactured goods, we are not motivated by nostalgia for some ‘bygone’ era of
heavy industry. We are motivated by concrete, modern evidence that manufacturing
matters: to national prosperity, resilience, and well-being.
10 As explained, for example, by McCombie and Thirlwall (2004). 11 Author’s calculations from ABS Catalogue 5209.0.55.001. In aggregate, the manufacturing sector’s
value-added accounts for less than 30 percent of the value of total manufacturing shipments, because
of the importance of these intermediate purchases of supplies, parts, and services.
A Fair Share for Australian Manufacturing 14
Taking Stock: Battered but
Resilient
Australian manufacturing has endured a difficult period of contraction and dislocation.
A complex and daunting set of pressures and crises has buffeted the sector continually
for two decades, including:
• A global boom in resource commodities that began in the 2000s, and entered a
second wave in the early 2010s. This resource boom diverted Australian capital,
labour, and entrepreneurial energy into resource extraction and export
projects, and away from value-adding manufacturing.
• The related over-appreciation of the Australian currency, boosted by
temporary surges in global commodity prices and resource industry profits,
which artificially (and temporarily) inflated Australian production costs relative
to other global manufacturers.
• The impacts of unbalanced globalisation and free trade agreements, which
reduced net demand for Australian-made manufactures and contributed to the
emergence of large trade deficits in manufactured products.
• Economic and financial disruptions arising from the Global Financial Crisis in
2008-09, which Australia was able to negotiate relatively successfully – but
which nevertheless damaged the viability of key Australian manufacturing
sectors (including, most notably, automotive production).
• Most recently, the devastating impacts of the global COVID-19 pandemic,
causing severe disruption to global supply chains, sharp contractions in output
and trade, and unknown consequences for business investment plans.
Australia’s manufacturing sector has survived these repeated challenges. It is smaller
than in the past, and does not make the appropriate and proportionate contribution to
national prosperity that it could and should. Indeed, manufacturing accounts for a
smaller share of national employment in Australia (around 7%) than in any other OECD
economy.
But despite these rocky times, the industry is still here. It has demonstrated an
impressive capacity to adapt and survive. Manufacturing remains a complex,
sophisticated, and resilient pillar of the national economy. It is Australia’s sixth-largest
A Fair Share for Australian Manufacturing 15
employer, providing relatively high-quality jobs to almost 900,000 Australians. It makes
a disproportionate contribution to national export and innovation performance. It
anchors hundreds of billions of dollars of input purchases, and hundreds of thousands
more jobs, through a complex supply chain that extends into every sector, and every
state, of the national economy. It generates tens of billions of dollars in taxes that
contribute to the maintenance of our national infrastructure of public capital and
public services. It will play an increasing role in equipping our economy with the
necessary technology and equipment to undertake the historic challenges of
decarbonisation.
Table 1
Profile of Australian Manufacturing
(2019 unless otherwise indicated)
Value Share Australia
Total
Sales1 $380 billion
Value-Added $105 billion 5.5%
Direct Employment 890,000 6.9%
Wages & Salaries Paid $62 billion 7.4%
Average Annual Income: All Employees Full-Time Employees
$70,000 $81,000
Operating Profit (before tax)1 $29 billion
Exports $95 billion 24.5%
Domestic Supply-Chain Purchases2 $240 billion
Capital Expenditure $9.7 billion 16.9%4
R&D Spending1 $4.6 billion 26.4%
Superannuation Contributions1 $5.1 billion
Indirect and Payroll Taxes Paid1,3 $8.3 billion
Source: Author's calculations from ABS Catalogues 5206.0; 5209.0.55.001; 5625.0; 6291.0.55.003; 6302.0; 8155.0; and DFAT TRIEC data. 1. 2017-18 data. 2. 2016-17 data. 3. Includes workers’ compensation premiums. 4. As share of private industry investment, recorded in ABS Catalogue 5625.0.
A Fair Share for Australian Manufacturing 16
In short, manufacturing is vital to Australia’s economic and social well-being. This
section provides a statistical portrait of Australia’s manufacturing sector today, and its
recent history. It will assess the strengths and weaknesses of the industry, and identify
the key ingredients of future recovery. A summary of vital statistics describing
Australian manufacturing today is provided in Table 1.
Manufacturing accounts for about $105 billion of value-added (or GDP), or around
5.5% of the national total. That is among the smallest proportional manufacturing
sectors of any industrialised country. Total value-added in the sector has declined since
its pre-GFC peak in 2008 (see Figure 2), but has been relatively stable in the last 5
years.
Figure 2. Manufacturing Value-Added, 2000-2019.
Source: Author’s calculations from ABS Catalogue 5206.0.
Manufacturing is composed of a wide range of different sub-sectors, with very
different economic, technological, and geographic features. And those sub-sectors
have experienced varying trajectories, as the overall manufacturing sector negotiated
the challenges of the past twenty years (Figure 3). Since 2010, for example, overall
manufacturing value-added has declined in Australia by around 9%. The decline was
especially severe in machinery and equipment production – including the losses
associated with the cessation of mass motor vehicle production here mid-decade.
Other sub-sectors, such as primary metal manufacturing, experienced less severe
A Fair Share for Australian Manufacturing 17
losses. Some manufacturing sub-sectors actually expanded during this time: such as
food products, which increased total value-added by 7%.
Figure 3. Manufacturing Value-Added, Change by Sector, 2010-2019
Source: Author’s calculations from ABS Catalogue 5206.0.
Manufacturing employment has been held back by the decline and subsequent
stagnation of overall manufacturing output. Moreover, since ongoing productivity
growth allows manufacturing to produce a given amount of output with less labour
input, it will also undermine employment totals – unless the total amount of output
grows at least as fast as average productivity. As illustrated in Figure 4, manufacturing
has lost close to 200,000 jobs since the turn of the century. Like value-added, total
employment has been relatively stagnant over the past five years at around 900,000
positions.
A relatively large share of manufacturing jobs is full-time: about 85% of jobs in
manufacturing were full-time in 2019. The incidence of part-time work in the sector is
half the average level of the national labour market as a whole. Wages are somewhat
higher than average, as well: around $70,000 per year across the industry (over
$80,000 for full-time workers), which is some 7% higher than economy-wide average
earnings. The existence of relatively higher-quality, better-paying jobs in
manufacturing is one of the key motivations for maintaining a strong domestic
manufacturing sector.
A Fair Share for Australian Manufacturing 18
Figure 4. Manufacturing Employment, 2000-2020
Source: ABS Catalogue 6291.0.55.003.
Trends in employment, as with value-added, vary greatly across the various sub-
sectors of manufacturing. Some sub-sectors have added jobs over the past decade,
even as the overall footprint of manufacturing shrank. Table 2 lists employment for
each manufacturing sub-sector, and net changes since 2010. Food manufacturing is
the largest single source of manufacturing work, and total employment in that sub-
sector grew 5% over the last decade. Even stronger growth occurred in the smaller
beverage and tobacco manufacturing sub-sector. The steepest job losses were
incurred in the printing and textile, clothing and footwear sub-sectors, which saw
employment decline by 30% or more. Transport equipment and other machinery and
equipment sectors are also major manufacturing employers; their employment totals
also declined by more than the average for all manufacturing.
A Fair Share for Australian Manufacturing 19
Table 2
Employment Change by Sub-Sector, 2010-2019
Employment
(2019, 000s)
Change from
2010 (000)
Change from
2010 (%)
Food Products 203.7 9.3 4.8%
Beverage & Tobacco 33.1 8.0 31.8%
Textile. Clothing & Footwear 32.1 -13.2 -29.1%
Wood Products 45.6 3.8 9.0%
Pulp & Paper 15.9 -3.1 -16.3%
Printing 34.6 -19.1 -35.6%
Petroleum & Coal 7.9 1.2 18.7%
Chemicals 48.3 4.2 9.6%
Rubber Products 35.9 3.3 10.2%
Non-Metallic Minerals 37.6 0.7 1.8%
Primary Metal 72.7 -12.8 -15.0%
Fabricated Metal 70.4 10.9 18.2%
Transport Equipment 68.0 -16.9 -19.9%
Machinery & Equipment 112.5 -8.1 -6.7%
Furniture 63.6 4.3 7.2%
All Manufacturing 884.6 -94.1 -9.6%
Source: Author's calculations from ABS Catalogue 6291.0.55.003.
An important advantage of manufacturing is that its presence is distributed widely and
relatively evenly across the entire country. Table 3 summarises data on manufacturing
output and employment by state. Manufacturing jobs account for around 7% of total
employment in every state: ranging from a low of 6.4% in WA to a high of 7.7% in SA.
And all states have suffered from the loss of manufacturing employment over the past
decade. Proportional losses have been greatest in SA (with almost one in five jobs lost
since 2010-11), where the closure of automotive manufacturing facilities had an
especially painful impact. Tasmania experienced the smallest proportional
manufacturing job losses – with manufacturing employment down by 5.5% since 2010-
11. In addition to its dispersal across all states, manufacturing also is well distributed
between urban and regional areas; many smaller cities and regional towns depend
critically on important manufacturing facilities, and the continued health of
A Fair Share for Australian Manufacturing 20
manufacturing is vital to the viability and prosperity of regional communities. This
broad distribution of manufacturing work across Australia confirms that all parts of the
country would benefit strongly from a new policy commitment to strengthening
domestic manufacturing.
Table 3
Manufacturing Activity by State 2017-18
State Manufacturing
Sales ($b)
Manufacturing Employment
Employment in
2017-18 (000)
Change Since
2010-11
Share Total
State
Employment
NSW 109.9 254.4 -7.7% 6.4%
Victoria 106.4 246.0 -9.4% 7.6%
Queensland 73.1 164.2 -12.1% 6.6%
WA 57.9 84.8 -12.1% 6.4%
SA 23.5 64.3 -19.0% 7.7%
Tasmania 6.7 18.2 -5.5% 7.3%
Australia Total1 381.8 840.3 -10.5% 6.7%
Source: Author's calculations from ABS Catalogues 8155.0 and 6291.0.55.003. 1. Includes territories.
The weakness in total output of manufacturing has, not surprisingly, contributed to
weakness in capital spending within the industry. Firms are reluctant to commit new
capital to an industry which has experienced such challenging market and
macroeconomic conditions. The weakness of capital spending has been reinforced by
challenges accessing sources of long-term finance for manufacturing capital
investments – especially for medium-sized firms, which have more difficulty accessing
conventional debt and equity capital sources. As illustrated in Figure 5, total capital
investments in Australia ranged between $12 and $14 billion per year in the late
2000s. The after-effects of the GFC, and the closure of motor vehicle manufacturing (a
particularly capital-intensive segment of manufacturing), resulted in an erosion of
capital spending, which fell to around $9 billion per year since 2013. Even that reduced
level of capital spending, however, constitutes a disproportionate contribution to
national capital investment performance. Manufacturing accounts for about one-sixth
of all private sector business capital spending, far more than its share of output and
employment.
A Fair Share for Australian Manufacturing 21
Figure 5. Capital Investment, Manufacturing, 2000-2019
Source: Author’s calculations from ABS Catalogue 5625.0.
The disproportionate investment contribution of manufacturing is especially visible in
the area of research, development and innovation. The manufacturing sector, despite
its smaller footprint, still ranks as Australia’s most energetic R&D investor. The sector
spent $4.6 billion on R&D in 2017-18. That was second in absolute terms to the
professional and scientific services sector (which allocated $5.1 billion to R&D the
same year). But as a proportion of sector value-added, manufacturing surpasses even
professional and scientific services in its R&D effort. Figure 6 ranks major sectors of
Australia’s economy by R&D spending as a share of sector value-added. Manufacturing
invests over 4% of its sectoral value-added in new innovation – four times larger than
the average experienced across Australia’s business sector as a whole.
Australia’s innovation performance has weakened in recent years, with a smaller share
of our total output invested in research. We are slipping in global rankings of
innovation performance – and the undersized presence of manufacturing, the most
innovation-intensive sector of the economy, has been a key factor in that erosion.
While manufacturing continues to make an outsized contribution to Australia’s
national innovation performance, it needs a stronger presence here for its full
potential contribution to be realised.
A Fair Share for Australian Manufacturing 22
Figure 6. Business R&D Spending as Share Sector Value-Added, 2017-18
Source: Author’s calculations from ABS Catalogues 8104.0 and 5206.0
Data on the direct output and employment of manufacturing does not fully describe
the strategic and structural importance of the industry to Australia’s overall economy.
As noted above, one of the qualitative advantages of manufacturing is its capacity to
anchor a large and far-reaching supply chain: thousands of different enterprises in all
parts of the economy, which sell supplies, parts, and services to manufacturing
companies. While these companies are not included within the usual statistical
definitions of ‘manufacturing,’12 their existence and viability depend directly on the
presence of their manufacturing customers.
A portrait of the complex and crucial supply chain which feeds the manufacturing
sector, and in turn supports large amounts of activity and employment in other parts
of the economy, can be developed on the basis of input-output statistics prepared by
the Australian Bureau of Statistics. Table 4 summarises the major categories of supply
chain purchases by Australian manufacturers. It is evident that the manufacturing
supply chain reaches into every sector, and every region, of Australia’s economy.
12 As noted by Advanced Manufacturing Growth Centre (2018a), many support functions – including
those performed both before and after the moment of direct production – are excluded from
conventional measures of manufacturing output and employment, yet are vital to the presence and
activity of the sector.
A Fair Share for Australian Manufacturing 23
Table 4
Australia's Manufacturing Supply Chain, 2016-17
$billion Jobs (000)
Direct Value-Added & Employment 104.7 915.0
Intermediate Inputs
Agriculture & Forestry 40.5 207.7
Mining 44.6 29.8
Intermediate Manufactures1 71.3
Utilities 8.7 7.1
Construction 3.0 8.0
Retail & Wholesale 14.4 28.3
Hospitality 2.7 26.4
Transport 17.1 60.7
Info. & Telecom 4.3 8.7
Finance 6.4 0.0
Property Services 2.4 7.4
Pro. & Scientific 14.2 67.7
Other Private Services 8.2 69.9
Public Services 2.9 35.3
Total Australian-Made Intermediate Inputs 240.7 557.1
Total Employment 1472.1
Imported Intermediate Inputs 265.6
Source: Author's calculations from ABS Catalogues 5209.0.55.001, Table 8; 8155.0; and 6291.0.55.003. 1. Employment associated with supply of intermediate manufactured products
purchased by other manufacturers are not listed, as that would constitute double-counting of manufacturing jobs already reported in the table.
Of course, large amounts of agricultural, primary and resource products are purchased
by Australian manufacturers, to then be transformed into value-added manufactured
products. Manufacturers also buy large amounts of semi-finished goods from other
manufacturers, for further refinement and assembly. The manufacturing sector also
purchases extensive inputs of services: including transportation, finance, trade, and
A Fair Share for Australian Manufacturing 24
business services purchases. Even some public services are directly purchased and
financed by manufacturers, such as vocational education.
Across the whole spectrum of supply industries, Australian manufacturers purchased
some $240 billion worth of domestically-produced inputs and supplies in 2016-17
(most recent data at time of writing). Those purchases support continued production
and employment in those supply industries. Based on sector-average employment
intensity ratios, we estimate that over 550,000 jobs in those supply industries depend
on purchases arising from the manufacturing sector.13 Added to the roughly 900,000
direct jobs in manufacturing itself, this suggests that a total of close to 1.5 million
Australians owe their employment directly or indirectly to the presence of domestic
manufacturing.
This confirms that direct sectoral employment statistics understate the true
importance of manufacturing in Australia’s overall labour market. Considering the total
supply chain that is anchored and supported by the presence of domestic
manufacturing, the combined footprint of the sector is much larger.
Unfortunately, over half of all the materials, parts, and supplies (‘intermediate inputs’)
purchased by Australian manufacturers are imported from foreign suppliers ($265
billion worth in 2016-17). This includes most of the more technology-intensive inputs,
such as machinery, equipment, and sub-assemblies. The heavy degree of import
penetration into Australia’s manufacturing supply chain undermines the spin-off
employment effects of domestic manufacturing – since the stimulus effect of those
purchases is effectively ‘exported’ to other countries. It also leaves our domestic
manufacturing sector vulnerable to disruptions in global supply chains (as have
occurred during the COVID-19 pandemic), and to uncertainty in global trade policy and
trade patterns. A policy vision to grow domestic manufacturing, based in part on more
balanced international trade relationships in manufactured products, would thus have
a double impact on domestic output and employment: boosting output of both final
products, and increasing Australian content in intermediate inputs.
13 Those jobs in related supply industries sell their output to Australian manufacturing establishments.
Without the domestic manufacturing base, it is certainly possible some of those suppliers would find
other outlets for their output (potentially foreign-based manufacturing customers). Nevertheless, it is
reasonable to consider these jobs as largely dependent on the health of Australian manufacturing.
A Fair Share for Australian Manufacturing 25
Australia’s Place in the World
Manufacturing is a global industry that depends critically on world trade flows. The
specialised nature of most manufactured products requires that producers be able to
produce their output in significant quantities, and then sell that output to a range of
global markets. This is particularly true of relatively small economies like Australia’s.
Indeed, one of the strategic attributes of manufacturing reviewed above is precisely
that it demonstrates an inherently higher export propensity than services.
Manufacturing is well-suited to international trade – and it accounts for a strong
majority of all international trade. Therefore, having a strong and healthy domestic
manufacturing sector automatically ensures that a country can participate more fully
and successfully in international commerce.
However, there is never any guarantee that those international interactions will prove
to be mutually beneficial. And in Australia’s case, failures of both trade policy and
industrial policy have undermined the extent to which domestic manufacturers have
been able to take advantage of global market opportunities – and have produced
dangerously lopsided patterns in our international trade engagement. This section of
the paper will review the current state of Australia’s manufacturing trade, and
consider ways in which it could be improved.
Of course, Australia’s economy has always been heavily dependent on the extraction
and export of natural resource products: including agricultural goods, timber, minerals,
and now energy products. This legacy reflects both our geographical endowment (a
large, relatively sparsely populated country with abundant resources) and our colonial
heritage (initially seen as a source of raw materials for more developed industries in
England). For decades it was a goal of national economic policy to foster a more
diversified presence in international trade, with greater participation in value-added
industries, and less reliance on raw resource extraction. After the Second World War,
Commonwealth policy focused on fostering domestic industrialisation, invoking
numerous strategies to tie domestic investment, production, and technology to trade
and fiscal opportunities. This vaulted Australia into the club of major industrial nations:
ranking in the top ten countries globally for production of automobiles and several
other higher-value products.
Unfortunately, over the past generation the composition of Australia’s merchandise
exports has regressed notably. Government policy came to emphasise other goals, and
domestic manufacturing began to decline (in both absolute and relative terms).
Australia’s export focus shifted back to the extraction and export of mostly
A Fair Share for Australian Manufacturing 26
unprocessed natural resources. Iron ore, coal, and liquified natural gas are our largest
exports. Global sales of Australian-made manufactured goods have declined. And a
very large, chronic trade deficit in manufactured products undermines our
international balance of payments year after year.
The growing dependence of Australian merchandise exports on unprocessed or barely
processed resource products is illustrated in Figure 7. It shows the share of total
merchandise exports accounted for by primary (unprocessed and barely processed
goods). By the 1990s, on the strength of postwar industry-building policy, that share
had declined to under half of all Australian exports. While Australia was still more
dependent on resource extraction than other industrial countries, that dependence
had been successfully reduced over time. Australia’s industrial and export presence
was more diversified. Since the early 2000s, however, in the wake rising global
commodity prices and a retreat from active industrial policy-making by Australia’s
governments, Australia has gone ‘backwards’ in structural terms. The country has
become far more dependent on resource exports, as domestic manufacturing
declined.
Figure 7. Primary Product Reliance in Australian Exports, 1995-2019
Source: Author’s calculations from DFAT TRIEC data. Includes LNG and non-monetary gold.
A Fair Share for Australian Manufacturing 27
By 2019, primary products (including LNG and gold ore) accounted for almost 75% of
total Australian merchandise exports – the highest share in decades.14 With such a
heavy reliance on a relatively narrow group of unprocessed export products,
Australia’s economy faces significant risks:
• Exposure to dramatic swings in global prices for resource commodities, which
are inherently volatile.
• Exposure to changes in global demand for basic commodities, which can shift
dramatically due to changes in technology and taste.
• Competition from other suppliers of the same resource products.
• Revenue losses arising from the long-run historical trend of natural resource
prices to decline relative to prices for other value-added products.
• Changes in global environmental policies, which are reducing global demand
for fossil fuels.
The flip side of the coin of Australia’s reliance on unprocessed resource exports in our
international trade is a precarious dependence on imports of value-added
manufactured products from other countries. These two personalities of Australia’s
trade are illustrated in Figure 8, which portrays the composition of Australia’s
merchandise trade.
Trade data published by Australia’s Department of Foreign Affairs and Trade (DFAT)
distinguishes four broad categories of merchandise: primary goods, simply
transformed manufactures (including food and bulk basic manufactures like primary
metals), elaborately transformed manufactured goods (such as machinery and
equipment, transportation equipment, and pharmaceuticals), and ‘other’.15 As is clear
in Figure 8, Australia’s exports are dominated by primary products, but our imports are
dominated by elaborately transformed manufactured products: such as sophisticated
machinery, motor vehicles, electronics, medical equipment and drugs, and more.
14 Figure 7 and subsequent analysis utilizes the Department of Foreign Affairs and Trade’s TRIEC
classification of commodity trade flows, with some adjustments. We reclassify most ‘basically
processed primary products’ as defined in the TRIEC system (including food products, refined minerals,
and pulp) as manufactured goods, since those products are treated as manufactures in other industrial
statistics (such as GDP and employment statistics reported above). We treat LNG exports, which have
been a major source of new exports for Australia, as a primary product (TRIEC considers LNG to be
‘processed’), along with non-monetary gold (which is categorised separately in the TRIEC system). 15 As noted in the previous footnote, the TRIEC data is adjusted to consider processed primary products
(other than LNG, which is considered here as a primary export) as simply transformed manufactured
goods, and to include non-monetary gold as a primary export.
A Fair Share for Australian Manufacturing 28
Figure 8. Composition of Australian Merchandise Trade, 2019
Source: Author’s calculations from DFAT TRIEC data. ‘Other’ includes non-monetary gold.
Our trade in simply transformed manufactures (such as food products, refined
minerals, and pulp) is broadly balanced, with our imports only slightly exceeding our
exports. But our trade in elaborately transformed manufactured products is very
unbalanced: we import almost six times as much as we export. On a combined basis
(counting both simply and elaborately transformed products), our manufacturing
imports are three times bigger than our exports. This results in a manufacturing trade
deficit of over $180 billion in 2019 (equal to a shocking 9% of national GDP).
Trade is supposed to be a two-way process that allows each participating country to
specialise in specific varieties of output, and permits producers to tap into specialised
markets in various countries. Where high-value manufactured goods are concerned,
however, Australia’s international trade is mostly a one-way street. In structural terms,
Australia mostly exports unprocessed resource products, which other countries then
transform into high-cost sophisticated manufactures – which are then sold back to us,
but at a premium price. The work, profit, and income associated with that value-
adding work are largely lost from Australia’s economy.
The deep imbalance of Australia’s manufacturing trade is further depicted in Figure 9.
For both simply and elaborately transformed manufactures, this figure indicates the
ratio of Australia’s imports to its exports. A ratio of 1 indicates broadly balanced two-
A Fair Share for Australian Manufacturing 29
way trade. A ratio higher than 1 indicates a net trade deficit in that product category
(with imports exceeding exports). And a ratio below 1 indicates a trade surplus.
Figure 9. Imbalance Ratios, Australian Manufacturing Trade, 1995-2019
Source: Author’s calculations from DFAT TRIEC data.
For simply transformed manufactures, Australia ‘holds its own’ in global commerce:
the imbalance ratio has increased slightly in recent years, but is only slightly greater
than 1 (implying a relatively small trade deficit). However, flows of those simply
transformed manufactures are smaller than for more sophisticated goods: two-way
trade totalled $120 billion in 2019, compared to two-way trade of $250 billion in
elaborately transformed manufactures. And within that much larger flow of
elaborately transformed product trade, the ratio of imports to exports has almost
doubled since the turn of the century. Australia now imports almost $6 of these high-
value products for every $1 we export. This enormously unbalanced structural trade
position for the most valuable and dynamic products sold in the global economy
substantially undermines our innovation, our current account balance, and our
incomes.
Since Australia imports so much more than it exports in manufactured products, the
inevitable result is a large and chronic trade deficit in manufactures – one that is
concentrated, as we have seen, in the most sophisticated and technology-intensive
products. The rise of this manufacturing trade deficit is pictured in Figure 10. The
deficit has more than quadrupled in absolute terms since the turn of the century. The
A Fair Share for Australian Manufacturing 30
manufacturing deficit has stabilised at around $180 billion in the last three years.
However, that is largely a reflection of recent national macroeconomic weakness, not
an indication of improving trade fortunes: even before the COVID-19 pandemic and
resulting economic crisis, a significant slowdown in Australian economic growth (held
back by weak business investment and consumer spending) reduced purchases of
(mostly imported) manufactured products such as motor vehicles, business machinery,
and others. This reduced the growth of high-tech imports: but it’s a sign of failure, not
success.
Figure 10. Manufacturing Trade Deficit, 1995-2019
Source: Author’s calculations from DFAT TRIEC data.
One crucial factor that has affected Australia’s manufacturing trade has been dramatic
swings in foreign exchange values. And this pattern also reflects another risk of
Australia’s undue resource dependence. The Australian dollar has experienced some of
the most dramatic fluctuations in exchange rates of any major currency. Figure 11
illustrates an index (calculated by the Reserve Bank of Australia) of exchange rates of
the Australian dollar compared to the currencies of our most important trading
partners; each partner currency is weighted in this index according to its share in
Australian trade.
A Fair Share for Australian Manufacturing 31
Figure 11. Trade-Weighted Exchange Rate Index, Australia, 1995-2020
Source: Reserve Bank of Australia.
The Australian dollar reached a historic trough early in this century, reflecting
depressed prices for natural resource commodities at that time. In 2001 the Australian
dollar traded as low as 50 cents (U.S.). Inflated by a strong but temporary boom in
global commodity prices, the dollar then appreciated strongly over the next decade,
reaching a peak of over $1.10 (U.S.) in 2011. The currency thus more than doubled in
value in U.S.-dollar terms; the cumulative increase was somewhat smaller in trade-
weighted terms (since our dollar appreciated less dramatically against the currencies
of our other major trading partners, such as China and Japan). Where global
commodity prices are concerned, however, what goes up inevitably comes back down.
Sharp declines in prices for energy and other unprocessed resources after 2013 sent
the Australian currency plunging down. By April 2020, amidst global uncertainty
caused by the coronavirus pandemic and further declines in global resource prices
(especially energy), the dollar fell to the mid-60-cent range (U.S.). Subsequently it
rebounded (at time of writing) to above 70 cents (U.S.). The financial volatility affecting
this most important relative price indicator is set to continue.
It is interesting to note that according to OECD estimates, the ‘purchasing power
parity’ (PPP) value of the Australian dollar is around 68 cents (U.S.).16 This means that
at 68 cents (U.S.), the dollar represents an appropriate and equivalent ‘fair value’
16 Author’s calculations from OECD ‘Purchasing Power Parities’ data.
A Fair Share for Australian Manufacturing 32
relative to our domestic consumer prices. When the exchange rate trades above its
PPP value, Australian-denominated products (including manufactures) look unduly
‘expensive’ in the eyes of foreign purchasers. The reverse is true when the dollar is
lower than its PPP benchmark. On that basis, the current trading range of the dollar
(around 70 cents U.S.) is not ‘low’ in fundamental economic terms (even though it may
seem low, relative to recent history). And assuming that global commodity prices
eventually recover as the pandemic abates, the Australian dollar is likely (in the
absence of countervailing policy actions) to rebound along with them, given the
tendency of currency traders to identify (and speculate on) our currency as a resource-
linked asset.
The roller-coaster pattern of Australia’s dollar therefore highlights another risk of our
extreme resource dependence. When times are good in resource industries, the
resulting upward pressure on the national currency (which is treated by international
financial traders as a proxy asset for placing ‘bets’ on resource price fluctuations)
causes enormous challenges for other export industries: including manufacturing,
tourism, and tradeable services. Prices for their output do not rise in tandem with
global commodity prices – but the competitiveness of Australian production on cost
grounds is dramatically harmed by resource-driven surges in the value of the currency.
Figure 12. Hourly Manufacturing Labour Costs ($US), 2000-2019
Source: Author’s calculations from Conference Board, Manufacturing Hourly Labour Compensation Costs.
A Fair Share for Australian Manufacturing 33
Our industrial vulnerability to exchange rate fluctuations is highlighted in Figure 12,
which portrays the evolution of Australian manufacturing labour costs relative to U.S.
levels. Wages are not high in Australia relative to other industrial countries, when
measured at PPP exchange rates. And non-wage labour costs are lower in Australia
than most industrial countries, due to relatively low payroll taxes. So domestic
manufacturing should normally be broadly competitive on labour cost grounds with
comparable industrial jurisdictions. However, that competitiveness can be quickly and
dramatically squandered by resource-driven over-appreciation of the currency.
As illustrated in Figure 12, Australian labour costs were unusually low relative to U.S.
levels around the turn of the century, when the Australian currency was undervalued.
The reverse was true during the resource-driven appreciation of the 2000s and early
2010s (interrupted by a temporary depreciation associated with the GFC in 2008 and
2009). At peak in 2011, hourly labour costs in U.S. dollar terms were 50% higher in
Australia than in the U.S. – due solely to the inflated value of the currency (which at its
peak was trading 60% higher than its PPP fair value). This artificial and unsustainable
increase in apparent Australian production costs was a major factor in the collapse in
manufacturing employment during that period – including the fateful decisions to
close down motor vehicle assembly operations here. The more recent return of the
dollar to more reasonable levels has erased that apparent but misleading labour cost
disadvantage. At the average 2019 exchange rate (70 cents U.S., just slightly above the
PPP level), hourly labour costs in Australian manufacturing were about 10% lower than
in the U.S. Ensuring that temporary resource booms, and their distorting impact on
exchange rates and relative costs, do not damage the viability of domestic
manufacturing in the future will be a critical priority for a more effective policy
framework for manufacturers.
Another crucial and damaging aspect of Australia’s international manufacturing trade
has been the one-sided impact of trade policy on the domestic manufacturing
footprint. Australia began to substantially – and mostly unilaterally – liberalise its
international trade policy in the 1980s. While high tariffs and other policies to promote
domestic manufacturing activity (like offsets and domestic content rules) were
important to Australia’s successful post-war industrialisation, by the 1980s it was
thought that a more subtle and flexible approach was required – in part to provide
Australian consumers with access to cheaper imported products. In theory, it was
argued, Australian manufacturing sectors could thrive in this liberalised environment,
by reorienting production toward global product lines (rather than the domestic
market); both imports and exports of manufactured products would increase,
according to this optimistic story. Tariff and non-tariff liberalisation then advanced
further with the negotiation of several free trade treaties: including the formation of
A Fair Share for Australian Manufacturing 34
the WTO in 1995, and a series of bilateral free trade agreements signed beginning in
the mid-2000s.
Today most manufactured imports enter Australia without tariffs, under the provisions
of a free trade agreement. There is no doubt that trade liberalisation (including
Australia’s unilateral reduction of tariffs in the 1980s and 1990s, the subsequent
bilateral FTAs, and multilateral initiatives through the WTO) has facilitated greater
import penetration in domestic markets. However, the impact of this trade
liberalisation on Australia’s exports of manufactured products has not been positive. In
practice, the expansion of manufactured imports after FTAs proved to be much faster
than growth in manufactured exports. Table 5 reports the growth in manufactures
trade (both exports and imports) recorded during the first five years of Australia’s
eight longer-standing bilateral free trade agreements: including those with Singapore,
the U.S., Thailand, Chile, Malaysia, Japan, Korea and China.17
Table 5 confirms that manufactured imports were stimulated far more visibly by FTAs
than manufactured exports. In six of the eight cases, the average annual rate of growth
of manufactured imports was faster than the average annual growth of manufactured
exports. In two of the cases (with the U.S. and with Chile) Australia’s manufactured
exports actually declined over the first five years the FTAs were in effect. The average
annual growth rate of manufactured imports in the first years of the eight FTAs (more
than 8% per year, on an unweighted basis) was 2.6 times faster than the average
growth rate of our manufactured exports (about 3%).
17 Table 5 does not include the Australia-New Zealand Closer Economic Relations Trade Agreement,
implemented in 1983, which built on previous long-standing trade arrangements between the two
countries, and did not at the time possess the same features as are regularly contained in modern
FTAs. It also excludes three recent FTAs signed by Australia (with Hong Kong, Indonesia, and Peru),
which were not yet in force by 2019. Due to their relatively recent implementation, Table 5 reports
results from only the first four years of the Australia-Korea FTA (implemented in December 2014), and
the first three years of the FTAs with Japan and China.
A Fair Share for Australian Manufacturing 35
Table 5
Manufacturing Trade Effects of FTAs
First Five Years in Effect
Growth in Exports Growth in Imports Cumulative
Change
Trade
Balance ($b)
Avg. Ann.
Growth
Cumulative
Change ($b)
Avg. Ann.
Growth
Cumulative
Change ($b)
Singapore 6.47% $0.9 24.28% $10.5 -$9.6
US -2.23% -$0.9 1.28% $1.6 -$2.5
Thailand 3.67% $0.3 17.25% $5.6 -$5.2
Chile -2.68% $0.0 4.00% $0.2 -$0.2
Malaysia 1.17% $0.2 8.24% $3.1 -$2.9
Korea1 1.19% $0.3 -0.48% -$0.3 $0.5
Japan2 2.83% $0.9 4.28% $3.9 -$3.0
China2 14.79% $5.9 6.56% $17.6 -$11.7
8 FTAs 3.15%3 $7.5 8.18%3 $42.0 -$34.5
Ratio Import Growth/Export Growth 2.6 5.6
Source: Author’s calculations from DFAT TRIEC trade pivot tables. Manufacturing includes processed primary goods (but excludes LNG). 1. First 4 years in effect. 2. First 3 years in effect. 3. Unweighted average of growth rates.
The two exceptions to that general pattern were Korea and China, for which Australia’s
manufactured exports grew faster after the FTA than manufactured imports. In Korea’s
case, neither manufactured exports nor imports changed much after the FTA came
into effect: imports from Korea declined slightly, while exports to Korea (much smaller
to start with) grew by just 1% per year. This stagnation of two-way trade flows
suggests the FTA had little impact on manufacturing trade at all.
In China’s case, Australia’s manufactured exports grew relatively quickly (almost 15%
per year) in the first three years of the Australia-China FTA, compared to a 6.5% annual
growth rate for manufactured imports. However, even this seemingly positive
experience reveals the structural weakness of Australia’s manufacturing trade position.
Almost all of the expansion in Australian manufactured products to China consisted of
processed food products: mostly meat products and beverages. Excluding food, other
manufactured exports to China grew more slowly: 4.7% per year. And because of the
lopsided starting position in bilateral manufactures trade when the FTA was
implemented (Australia’s manufactured imports from China were 7.6 times larger than
A Fair Share for Australian Manufacturing 36
manufactured exports to China in 2015 when the FTA came into effect, with a
manufactured trade deficit of over $50 billion), the absolute growth in imports from
China still exceeded the absolute growth in our exports there by a 3-to-1 ratio. In other
words, since our exports were starting from a much smaller initial level, the absolute
gap between bilateral imports and exports widened, despite the faster proportional
growth of exports. The bilateral manufacturing trade deficit reached $64 billion in
2019. Therefore, even for the one FTA that seemed to successfully stimulate
manufacturing exports, the resulting trade pattern became even more unbalanced
after the FTA came into effect – once again revealing Australia’s precarious reliance on
resource-based exports (in this case including processed meat and dairy products).
Across the eight agreements, the absolute increase in manufactured imports over the
first five years of the FTAs’ implementation was more than five times greater than the
absolute increase in manufactured exports from Australia. Combined manufactured
imports grew by $42 billion in the first years of the eight FTAs, compared to a
combined increase in exports of just $7.5 billion. The combined manufacturing trade
deficit thus worsened by some $35 billion.18 The deterioration in bilateral
manufacturing trade balances after FTAs was most severe with China (with the deficit
widening by $12 billion), Singapore (down almost $10 billion), Thailand (down over $5
billion), and Japan (down $3 billion).
Australia now incurs a manufacturing trade deficit with every one of those eight FTA
partners.19 And across the eight FTAs in total, the combined annual manufacturing
trade deficit reached $127 billion in 2019. That represents over two-thirds of
Australia’s overall $180 billion trade deficit in manufactures last year. Based on
average employment-to-output ratios in Australian manufacturing, the combined
bilateral manufacturing trade deficits with these eight FTA partners corresponds to the
loss of over 300,000 Australian manufacturing jobs.20 It is clear, therefore, that those
FTAs have exacerbated Australia’s broader trade failures in manufacturing – not
ameliorated them. And the claim that more trade liberalisation will somehow open up
markets for Australian manufactured products, and improve our foothold in
international trade, has been firmly disproven by realised experience. While
18 Since the FTAs were implemented at different times, that combined $24 billion widening of the trade
deficit did not occur contemporaneously. 19 That was not always the case. Prior to these FTAs, Australia experienced occasional manufacturing
trade surpluses with most of the countries in Table 5, including Singapore, Thailand, Malaysia, Chile
and even Korea. 20 The $127 billion combined bilateral manufacturing trade deficit with these eight FTA partners
represents a value of gross output equal to about one-third of total Australian manufacturing
shipments. An equivalent amount produced in Australia, on average, would therefore support the
creation of about 300,000 jobs (one-third of current total Australian manufacturing employment).
A Fair Share for Australian Manufacturing 37
international trade is critical to the maintenance of strong manufacturing industries
(given economies of scale and the specialised nature of manufactured goods), a
different strategy is clearly required to attain a more balanced and mutually beneficial
engagement with our trading partners.
Box: Australia’s Trade in Medical Equipment
Concerns over Australia’s ability to ensure reliable supplies of health care equipment and
supplies during the COVID-19 pandemic have sparked renewed concern with our domestic
manufacturing capabilities. Australia demonstrates a high quality of primary medical research,
engineering capacity (related to medical devices and machinery), and medical services. And
there are some domestic manufacturing firms which have successfully entered global markets
for some categories of medical devices, pharmaceuticals, and other products. However, as
with other manufactured products, Australia’s domestic capacity to manufacture high-value
medical supplies and equipment is badly underdeveloped relative to our needs.
DFAT trade data identifies two broad categories of medical manufactures at the 3-digit level of
disaggregation: diagnostic equipment and instruments. The latter category represents a larger
amount of two-way trade, worth over $5 billion in 2019. These two categories only capture
some of total trade in medical supplies and equipment; many other medical-related products
are reported within other trade categories. In the two explicit categories of medical products,
Australia’s imports are much larger than our imports: by a ratio of 7-to-1 one for diagnostic
equipment, and 2-to-1 for instruments (see Table 6). The combined trade deficit in those two
sectors amounted to some $2.6 billion in 2019.
Table 6 Medical Equipment Trade, 2019
($ billion) Exports Imports Balance
Medical diagnostic equipment 0.14 0.98 -0.84
Medical instruments 1.70 3.45 -1.75
Total 1.84 4.43 -2.59
Source: Author's calculations from DFAT commodity trade pivot tables.
Australia’s strong research and engineering capacities, and our large and sophisticated
domestic market for advanced medical products and services, gives us a decent starting point
to develop further capacities and investments in advanced manufacturing of medical
equipment. This specialised sector could thus constitute a good example for applying pro-
active sector development strategies to industries with strategic national importance.
A Fair Share for Australian Manufacturing 38
Making the Most of Our Minerals:
Adding Value
Because Australia’s merchandise trade has been so narrowly specialised – with exports
dominated by unprocessed resources, and imports dominated by sophisticated value-
added products – Australia fulfils a role in global commerce more typical of a
developing country, rather than an advanced industrial nation. This pattern of trade
undermines the extent to which Australia’s economy can incorporate innovations and
modern technology in both products and processes. To be sure, some aspects of
resource extraction rely heavily on new technologies (such as automated extraction
and transportation techniques), and large resource firms do make significant
investments in new technology. But in proportion to its size, the resources sector
undertakes far less innovation and research than manufacturing: as indicated in Figure
6 above, the mining sector invests just 0.7% of sector value-added in new research and
development, one-sixth as much as manufacturing. The growing focus of Australia’s
economy on resource extraction, matched by the erosion of innovation-intensive
manufacturing, has thus undermined our overall national innovation performance.
And by exporting resources, and then re-importing the value-added products
manufactured from those resources, Australia forgoes the income and employment
potential associated with that value-added work.
Let us consider in more detail just two examples of the economic losses resulting from
Australia’s perverse specialisation in resource extraction, combined with our under-
developed manufacturing capacity. Australia possesses the world’s most abundant
reserves of two vital minerals that are essential materials in modern industrial society:
• Bauxite, the raw ingredient in making aluminium, used in an enormous array of
transportation, construction, and equipment applications
• Lithium, the crucial component of modern lithium-ion batteries used in
stationary and mobile batteries of all sizes
Both minerals are being used in increasing amounts. One reason for this long-run
increase in demand is their attractive environmental properties: aluminium is lighter in
weight than other metals, and achieves superior energy conservation results in both
transportation and construction uses. Lithium, meanwhile, is a crucial input in
renewable energy and transportation systems. Australia, however, is squandering
much of the potential benefits that could be generated as a result of its fortunate
A Fair Share for Australian Manufacturing 39
endowment of both minerals. Instead of leveraging its abundant resources to foster
value-added processing, refining, and manufacturing of products containing those
minerals, Australia has largely limited its role to extraction. This forgoes enormous
income-generating opportunities associated with value-added industry.
Figure 13 illustrates the average price attained for different stages of aluminium
products. Australia’s exports of raw unprocessed bauxite have grown substantially in
recent years: rising over 50% between 2010 and 2019. However, raw bauxite is a low-
value commodity: it sells for around $40 per tonne. Bauxite must be processed first
into alumina (which sells for about $500 per tonne), and then smelted into aluminium
(recently selling for around $2700 per tonne). Australian alumina refining has been
stagnant, even as exports of raw bauxite boomed; in fact, alumina production declined
slightly over the last decade (with one major refinery in Gove, NT closing in 2014).
Meanwhile, aluminium smelting has declined significantly in Australia, with two
smelter closures in the last decade – and the future of another (in Portland, Victoria)
under threat. Meanwhile, the manufacture of more complex value-added aluminium
products (such as auto parts, building materials, and electronic equipment) has also
declined in Australia in recent years, alongside the general contraction in domestic
manufacturing. Australia is thus increasingly concentrating its activity in this valuable,
critical industry on the lowest-value rung of the economic ladder: raw extraction.
Figure 13. Average Prices for Aluminium Products, 2019
Source: Author’s calculations from Dept. of Industry (2019); average prices for first 9 months of 2019.
A Fair Share for Australian Manufacturing 40
A similar, even more concerning pattern has emerged in Australia’s production of
lithium. This mineral will play a central role in the development of a decarbonised
global economy. Australia has the world’s third largest proven deposits of lithium –
and the form of Australia’s reserves (in hard rock form, rather than brine) is superior
for both processing costs and quality. Australia has quickly become the world’s largest
producer of raw lithium, exporting $1.2 billion of spodumene (the raw form of mined
lithium) in 2018. Spodumene sold in 2019 for an average of around $750 (U.S.) per
tonne. Global prices for raw spodumene have fluctuated dramatically, in line with
experience of global commodity markets for other bulk, undifferentiated resource
products; recently they have declined dramatically on fears of oversupply.
Figure 14. Average Prices for Lithium Products, 2019
Source: Author’s calculations from U.S. Geological Survey (2019) and industry sources.
Despite the potential wealth represented by our unmatched reserves of lithium, if
Australia’s ambitions are limited to extracting and exporting raw lithium, then we will
consign ourselves once again to a stunted, low-value role in the global value chain of
batteries and products which contain them. Spodumene must first be refined into
intermediate chemical products (either lithium carbonate or lithium hydroxide21).
Lithium carbonate sells for around $10,000 (U.S.) per tonne. It is then manufactured
21 Lithium hydroxide is more valuable, and another advantage of Australia’s high-quality hard-rock
lithium is that it can be processed directly into lithium hydroxide rather than first into lithium
carbonate (as must occur with brine-extracted lithium).
A Fair Share for Australian Manufacturing 41
into batteries; that stage of production amplifies the total value of output many times
again. For example, if ultimately manufactured into medium-sized batteries for electric
vehicles, 1 tonne of spodumene would correspond to close to $150,000 (U.S.) worth of
batteries. Those batteries, once installed in electric vehicles (using the Tesla Model S as
an example, retailing for around $100,000 each), would then correspond to some $1.2
million worth of final product. This value-chain is illustrated in Figure 14.
A similar story can be told about Australia’s other major resource exports. By focusing
on extraction and export of raw minerals and other primary products, Australia forgoes
the potential benefits of advanced manufacturing for productivity, innovation, incomes
and environmental performance. Conventional trade theory often suggests that
countries should pursue a specialisation in international trade that matches their
‘comparative advantage’: assumed to reflect some natural or inherent talent or
resource abundance.22 But no country was ever naturally ‘endowed’ with an innate
ability to produce high-value innovation-intensive manufactured products (like electric
vehicles or sophisticated aluminium products. Those industries emerged in other
countries (like Germany, the Nordic countries, Japan, Korea, and now China) only with
the support of deliberate, pro-active industry policy interventions. Accepting a
subservient role as supplier of raw materials to other countries, which in turn build
more dynamic, innovative, and diversified economic structures (partly with the help of
our raw resources), imposes unnecessary and costly constraints on Australia’s future
prosperity.
A shocking insight into Australia’s underdeveloped role in world trade, and our
precarious dependence on exports of unprocessed raw materials, can be gleaned from
the work of the Growth Lab at Harvard University in the U.S.23 This research centre
analyses the direction and composition of trade for virtually all countries in the world,
and then develops a score of economic complexity for each nation: based on the
intensity of technology, reliance on innovation, and connection to other complex
economies. The most recent edition of this work (for 2017) ranks Australia as the 93rd
most complex economy in the world (see Table 7). We ranked just above Pakistan and
Mali, but behind Morocco, Uganda, and Senegal. Since the turn of the century, when
22 There are many other theoretical assumptions that are essential to comparative advantage models of
international trade (and policy prescriptions arising therefrom), but which are not valid in real-world
settings: including assumptions of full employment, competitive product and factor pricing, and the
idea that an entire country can be described by a ‘representative’ household. See Stanford (2015), Ch.
22 for discussion of the shortcomings of comparative advantage theories. 23 See Growth Lab at Harvard University (2019) for details and methodology. A similar analysis and
ranking is published annually by the Observatory of Economic Complexity (2019), based at MIT; it also
assigns Australia a low and declining global rank according to economic sophistication, far out of step
with other industrial countries.
A Fair Share for Australian Manufacturing 42
the global commodities boom and our own policy passivity reoriented our economic
focus onto extraction rather than adding value, Australia has fallen 29 places in this
ranking. By this structural indicator, therefore, Australia is rapidly regressing in
technological and structural terms: becoming structurally more similar to developing
countries, rather than leading industrial economies. In turn this squanders our
collective potential to use our full productive and innovative capacity as a nation.
Table 7
Global Rankings of Economic Complexity, 2017
Country Rank Rank Change
Since 2000 Score
Japan 1 0 2.28
Switzerland 2 +1 2.14
South Korea 3 +16 2.05
Germany 4 -2 2.02
Singapore 5 +6 1.81
Czech Republic 6 +7 1.79
Austria 7 +1 1.71
Finland 8 -2 1.69
Sweden 9 -5 1.67
Hungary 10 +12 1.64
* * *
Morocco 90 +3 -0.50
Uganda 91 +34 -0.55
Senegal 92 -9 -0.56
Australia 93 -29 -0.60
Pakistan 94 +8 -0.62
Mali 95 -11 -0.62
Source: Growth Lab at Harvard University (2019).
This is a very worrisome indication of the extent to which Australia has come to
depend on extraction and export of raw materials. While resource exports can support
some good jobs, and generate strong incomes (when global commodity prices are
high, at least), it is a narrow and precarious basis for long-term economic
A Fair Share for Australian Manufacturing 43
development. Most countries aspire to fulfil a larger, more balanced, and ultimately
more prosperous role in the global economy. Australia should do likewise. If we want
to have access to the same technological and economic opportunities as countries like
Japan, Germany, or even Singapore, we will need to consciously reshape our role in
the world economy, and aspire for a more promising and diversified economic future.
Revitalising our manufacturing sector, and ensuring that Australia can participate
proportionately in the activity of this most innovation-intensive of industries, is an
essential precondition to achieving this goal.
A Fair Share for Australian Manufacturing 44
Making the Most of Our People:
Skills and Training
A crucial barrier holding back the potential revitalisation of Australian manufacturing is
the inability of our present vocational education and training system, damaged by
years of underfunding and failed policy experimentation, to meet the need for highly-
skilled manufacturing workers. The skills challenge facing manufacturing is all the
more acute because of the transformation of the sector toward more specialised and
disaggregated advanced manufacturing processes. New technologies (including
Industry 4.0 and the ‘internet of things,’ additive manufacturing and 3D-printing, and
broader application of robotics and automation) allow for many manufacturing
processes to take place in smaller, customised volumes and in more remote locations.
Those trends will enhance the opportunities for Australian-based facilities to
participate in global production chains (often undertaking particular stages of
production, rather than start-to-finish vertically integrated assembly). These models of
advanced manufacturing naturally result in greater demand for highly-trained workers
in all occupations: production workers, skilled trades people, technology specialists,
and managers.
It may seem counter-intuitive that an industry that has lost over 100,000 positions in
the past decade could be experiencing shortages of workers. But there are key
structural reasons for the emergence of potentially binding skills shortages, even in an
industry which has shrunk in absolute terms. The reorientation of manufacturing
production around more specialised and skills-intensive production strategies
reinforces the need for more highly trained and technology-capable manufacturing
workers.
Moreover, the coming demographic transition within the manufacturing workforce will
be particularly acute among highly skilled tradespeople, technicians, and other
specialised workers, many of whom joined the industry during the 1980s and hence
are rapidly approaching retirement age. Indeed, the manufacturing workforce is one of
the oldest of any sector in Australia. The average age of manufacturing employees in
2018 (most recent data) was 42 years old, more than two full years older than the
average for the overall Australian workforce. 45% of Australian manufacturing workers
are over age 45. One-fifth are over age 55.24 So there will be a surge of retirements
from the industry in coming years, requiring an ambitious and pro-active effort to
24 Age statistics based on author’s calculations from ABS Catalogue 6306.0.
A Fair Share for Australian Manufacturing 45
ensure an inflow of adequately trained younger workers. And if a successful ‘Fair
Share’ strategy for Australian manufacturing was implemented (as proposed below),
resulting in a significant expansion of total employment over the coming decade, then
the need for a steady flow of well-trained entrants would be all the more pressing.
Finally, the sectoral, occupational and geographical diversity of manufacturing
employment means that shortages can arise in specific fields, even when overall
labour demand conditions are inadequate.
Even under status-quo economic conditions – with manufacturing operating at far
below its proportional ‘fair share’ potential – the National Council for Vocational
Education Research (NCVER) projects that the manufacturing sector will need to
recruit almost 300,000 workers in the coming eight years.25 The distribution of those
expected openings (both to offset retirements and fill new openings) is illustrated in
Figure 15. The relatively strong food products sector accounts for the largest number
of projected openings, followed by machinery, metal products (both primary and
fabricated), and transportation equipment.
Figure 15. Job Openings by Manufacturing Sub-Sector
Source: Data from Shah and Dixon (2018).
Of course, if government committed to a strong and ambitious ‘fair share’
manufacturing strategy, expanding the total sector to a size proportionate with
25 See Shah and Dixon (2018).
A Fair Share for Australian Manufacturing 46
Australian consumption of manufactures, then the required flow of new workers to
the industry would be more than twice that estimate.26 This would put additional
pressure on Australia’s vocational training system. Without strong efforts to improve
vocational education, the recovery in manufacturing envisioned in this report could be
cut short by inadequate availability of skilled labour.
In short, the manufacturing sector has an urgent need for a concerted and sustained
effort to strengthen the sector’s vocational education and training system. To
succeed, this effort will require cooperative participation by all stakeholders:
government, industry, educational institutions, and unions.
The current operation of the VET system is not meeting the needs of Australian
manufacturers, as confirmed by abundant published research.27 In addition to failing
to provide manufacturing employers with an adequate pipeline of top-quality skilled
workers, the system is also failing to meet the needs of the wider community for
access to high-quality training – and for corresponding pathways to decent work. At
present, training delivery is increasingly oriented around fragmented packages of
knowledge: ‘micro-credentials’ and other narrow training units, most often packaged
and delivered by private training providers. These packages may address immediate,
narrow, enterprise-specific requirements, but they do not permit workers to
accumulate the comprehensive, recognised, and portable qualifications necessary to
fulfil all the requirements of a trade, and to adapt to new assignments and
technologies. This focus on a very narrow vision of qualifications reinforces a culture
of ‘training for the enterprise,’ whereby employers primarily commission training to
meet specific requirements without investing in more comprehensive and flexible
capacities. This then inhibits the overall ability of the manufacturing workforce to
respond, adapt and redeploy in a variety of situations – such as shifting jobs within an
enterprise, moving to other firms or sub-sectors, or responding to changes in wider
economic conditions.28
Failed experiments with market-based delivery models, contestable training programs,
and outright privatisation of VET services have also added to the malaise of vocational
training. The outsized role in the present VET system played by private training
providers, subsidised with poorly-supervised public payments, has also damaged
credibility and trust in the value of vocational education that is so important in eliciting
commitments (from both employers and students) to ongoing investments in skills
26 As explained below, a ‘Fair Share’ strategy to expand total domestic manufacturing to a size
commensurate with Australian use of manufactures would imply new job creation of over 400,000
positions, on top of NCVER’s forecast for (mostly replacement) job openings. 27 See Carney and Stanford (2018) for a recent summary of the evidence. 28 The importance of this flexibility is emphasised by Buchanan and Jakubauskas (2010).
A Fair Share for Australian Manufacturing 47
acquisition. At the same time, the capacity of public ‘anchor’ institutions (and the
TAFE system in particular) has been eroded by funding cutbacks and misplaced faith in
market-based competition. For all these reasons, the vocational training system in
Australia has been in full-blown crisis for years – and the accelerating drop-off in
enrolments and apprenticeships that has resulted from the COVID-19 economic
downturn now risks pushing the whole system into terminal decline.
The crisis in Australia’s VET system affects all industries and sectors, not just
manufacturing: however, manufacturing is among the industries most dependent on a
regular flow of qualified, certified vocational graduates. Without urgent efforts to
rebuild VET and restore the capacities of the TAFE institutions, the inadequacy of
vocational education in Australia will limit the future expansion of manufacturing as
envisioned in our ‘fair share’ revitalisation plan.
There are several specific steps that must be taken to strengthen and reorient the VET
system in manufacturing, in the face of these urgent concerns. Of course, addressing
the skills crisis in manufacturing can only occur in the context of broader efforts to
reform vocational education more generally – since most of the problems (including
the failure of subsidised market delivery of VET services) are system-wide in nature. At
the same time, however, numerous measures must also be taken to address the
particular skills challenges facing manufacturing. They include:
• Shifting the emphasis of curricula and training programs toward comprehensive
and complete qualifications, rather than micro-credentials.
• Enhancing the capacities of TAFE teachers in manufacturing fields, and investing in
modern capital equipment for training.
• Encouraging partnerships on customised joint training initiatives between specific
TAFEs and firms or groups of firms.
• Developing and implementing higher-level and multi-disciplinary qualifications to
reflect emerging skills and composite capacities in advanced manufacturing (in
areas such as digital machine control, composite and carbon materials, robotics,
and Industry 4.0/internet-of-things applications in manufacturing).
• Integrate basic literacy and numeracy training into VET offerings at all levels.
In addition to repairing and strengthening the activities of VET providers (centred on
resuscitating the TAFE system), measures are also needed to support the expansion of
apprenticeships in manufacturing with fiscal measures, instruction resources, and
mentoring. The number of apprentice positions in manufacturing has declined
dangerously in recent years. This largely reflects the short-sightedness of employers,
A Fair Share for Australian Manufacturing 48
and the perverse effects of competition between manufacturing employers for scarce
skilled workers (with the result that many employers would rather ‘poach’ skilled
workers from other firms, rather than invest in developing their own skilled workforce
over time). This myopic and self-interested approach contrasts with the success of
other countries (Germany being a prime example) in which the responsibility to
organise and fund comprehensive initial and ongoing training is accepted as a normal
feature of business, and all stakeholders are engaged in the process (including
employers, training institutions, unions, and governments). The lack of consistent fiscal
support for apprenticeships in manufacturing is another factor behind the erosion of
on-the-job training; government has a major role to play here, too.
The fragmentation of vocational training activity – between competing employers,
competing private training providers, and various levels of government – further
hampers Australia’s ability to develop and manage a consistent, integrated VET
system. One practical step that could assist in achieving a more coherent and effective
VET framework would be the establishment of a leadership-level multi-partite
Manufacturing VET Policy Board to gather better information about future needs for
and shortages of skilled workers, coordinate VET initiatives in the sector, and represent
the interests of manufacturing in broader VET processes and dialogues. This proposal
will be discussed further below.
A Fair Share for Australian Manufacturing 49
Making the Most of Our Energy: A
New Industrial Synergy
Manufacturing needs energy. The Australian manufacturing sector spends around $5
billion per year on electricity, and another $1 billion for natural gas (used both for
energy and as a feedstock in chemical processing). Manufacturing investments have
always been linked to availability of reliable, competitive energy. But now there is a
new dimension shaping the energy choices of manufacturers: the environmental
sustainability of competing energy sources. To meet government regulations on
greenhouse gas emissions, and fulfil the expectations of customers and financial
investors regarding sustainability concerns, manufacturers are increasingly focused on
the transition to renewable energy sources (including hydro-electricity, solar, wind and
geothermal).
Australia’s inconsistent and fragmented energy policies have caused major financial
distress and uncertainty for the manufacturing sector over the past two decades.
Electricity prices have skyrocketed due to privatisation, a lack of integrated national
planning, and supply disruptions. Gas prices have also been driven up by policies such
as unrestricted gas supply to export LNG projects – which has led to inflated prices for
domestic consumers (who now may pay more for Australian gas than foreign
customers29). The Australian government has failed to implement a stable and
consistent policy framework for energy security and sustainability, and is unduly
influenced by narrow sectional demands to protect fossil fuel industries.
This chaotic status quo has not served manufacturers well. As indicated in Figure 16,
electricity prices for manufacturing industrial users have skyrocketed by 180% since
2000. Electricity prices have grown three times as fast during this period as overall
input costs for manufacturing. Gas prices – driven upward by the redirection of most
domestic supply to offshore LNG markets – have doubled in the same period, also
rising far faster than other input costs. High prices and unreliable supply (coal-fired
electricity facilities, in particular, have demonstrated the worst reliability of any energy
source in recent years30) have significantly damaged the competitiveness of Australian
manufacturing. Despite this sorry record, the Commonwealth government aims to
reinforce and even increase the reliance of our energy system on fossil fuels. Most
recently this perverse bias has been reflected in far-fetched proposals to publicly
29 See Institute for Energy Economics and Financial Analysis (2019). 30 See Quicke and Brown (2020), for example.
A Fair Share for Australian Manufacturing 50
subsidise new coal-fired electricity generation facilities, and to expand natural gas
infrastructure and consumption.
Figure 16. Input Prices for Manufacturing, 2000-2020
Source: Author’s calculations from ABS Catalogue 6427.0, Table 13.
The vested interest of fossil fuel industries in maintaining and subsidising the
continued expansion of fossil fuel production and use, despite the accelerating global
shift away from carbon-based energy sources, distorts the energy system and damages
manufacturing. A worrisome recent example was the overwhelming but misplaced
emphasis placed on accelerating and subsidising natural gas projects as part of the
Commonwealth government’s National COVID-19 Coordination Commission (NCCC).31
The unfounded hope that massive developments in fossil fuels (an industry that is
destined to disappear within coming decades) could lead Australia’s economic
recovery from the COVID recession, not only misunderstands the fundamental change
that has occurred in the economics of energy; it also squanders an important new
source of competitive advantage which could benefit Australian manufacturing,
through development of our unmatched endowments of renewable energy. Charging
ahead with government-mandated and publicly-subsidised gas projects will ultimately
result in stranded capital assets and further distortion in energy markets. Pushing
more gas supply into the system will not even reliably reduce energy prices for
manufacturers. After all, Australian gas production increased by 150% between 2013
31 The undue focus on gas projects in the NCCC’s work is detailed by Morton (2020).
A Fair Share for Australian Manufacturing 51
and 201932 – yet prices skyrocketed for domestic industrial users, because almost all
the new production was exported. Simply increasing gas supply (without a strong
domestic gas reservation policy, curtailments on gas exports, and price controls –
measures all fiercely opposed by the gas industry) provides no assurance at all of more
affordable or reliable energy, and constitutes a distraction from the true energy
opportunity facing Australian manufacturing.
Renewable energy is a far more promising avenue to strengthen energy supply for
Australian manufacturing, and foster new competitive industries and exports. The
technology and economics of renewable energy has been thoroughly transformed in
recent years. Renewable energy has become significantly less expensive than fossil fuel
generation – even allowing for energy storage (such as batteries or pumped hydro).
Australia has unmatched potential to supply renewable energy, given our large land
mass and superior solar and wind resources. Rapid roll-out of renewable energy
supplies thus has great potential to provide manufacturers with inexpensive, reliable
and sustainable power. This is far more promising than placing hope in further fossil
fuel developments – including proposals to use gas as a so-called ‘transition fuel’.
Figure 17. Levelised Generation Costs
Source: Graham et al. (2018). Renewables includes six hours pumped hydro storage.
32 Author’s calculations from Dept. of Industry, Science, Energy and Resources, Resources and Energy
Quarterly, Table 31.
A Fair Share for Australian Manufacturing 52
Figure 17 compares the costs of different energy sources for electricity generation, on
a full lifetime cost basis.33 Renewable energy sources already enjoy a cost advantage
relative to fossil fuel generation: especially compared to coal, but even cheaper than
natural gas. More importantly, the cost of renewables is falling rapidly, for various
reasons: improvements in technology, new methods of generation (such as offshore
wind), and economies of scale in production and operation. Over the next 30 years,
the full-cycle cost of renewables will fall by at least another 20% – whereas the costs
(both financial and environmental) of fossil fuel use will become more burdensome.
Nahum (2020) has estimated annual power cost savings to manufacturers if the
sector's current use of fossil fuel-fired power is fully transferred to renewables (as
existing generating facilities are retired and replaced). The manufacturing sector's
power bill would decline by an estimated $1.6 billion per year, or 23 per cent,
compared to the current fuel mix. The saving swells to $2.2 billion (in constant dollars)
by 2050, thanks to continuing declines in the costs of renewable energy. This
comparison includes the costs of six hours of pumped hydro energy storage. It does
not factor in a price on carbon, which would increase the cost of coal and gas-fired
power; if one is included, the savings are commensurately greater. Similarly, if the
need for storage is reduced over time,34 then the cost of renewable supply is
substantially reduced even further.
Many manufacturers have already identified the potential savings of renewable energy
to their operations, and have moved ahead with expanded projects that leverage
Australia’s unmatched renewable resources – despite the uncertainty created by
inconsistent federal energy policy. Some firms are contracting with renewable energy
suppliers through power purchase agreements (PPAs) to underwrite new renewable
generation, and slash their own energy costs (by up to 50 per cent). Examples of
manufacturers using this strategy include Bluescope Steel and Carlton United
Breweries.35 These renewable facilities are not co-located with manufacturing, nor do
they need to be; rather, the PPAs match incremental power inputs to the grid with an
equivalent demand from manufacturers elsewhere on the grid.36
33 See Graham et al. (2018) for details on methodology of levelized cost comparisons. 34 As renewable energy becomes more commonplace across a better-integrated electricity grid, and
hence generation of solar and wind power becomes more diversified (with respect to region, time of
day, and grid connectivity), it is not clear that much storage capacity will be required at all; see
Diesendorf and Elliston (2018). 35 Nahum (2020) discusses several examples. 36 Requisite transmission and storage infrastructure must also be developed as this strategy becomes
more popular.
A Fair Share for Australian Manufacturing 53
Meanwhile, heavy manufacturers including primary metals producers (like Liberty
House Group and Sun Metals) have installed dedicated and co-located solar arrays to
power their manufacturing facilities. Improvements in the technology of renewables
generation, transmission and storage now allow renewable energy to be used in even
the most demanding of heavy industrial applications.
Australia’s unmatched renewable energy endowment thus has the realistic potential to
power a revitalised and prosperous domestic manufacturing industry. Possibly the
most exciting opportunities to leverage renewable energy to power a renaissance of
domestic manufacturing involve a virtuous cycle of using our renewable resources to
manufacture products and equipment, that in turn can be used as inputs in the further
development of that renewable endowment. By connecting manufacturing
investments with renewable energy developments, Australia has the possibility to
simultaneously accelerate the roll-out of renewable energy systems (with great
economic and environmental benefits), while expanding Australian manufactured
inputs to those projects. Examples of this new industrial synergy include:
• Using domestically-produced ‘green’ steel and aluminium to build wind
turbines, in turn supporting the transition of our energy mix to renewables
• Expanding production of solar panels in Australia
• Using renewable electricity to process Australian lithium and manufacture
batteries, which in turn could support expansion of domestic electric vehicle
(EV) manufacturing
International evidence shows that countries which have reduced greenhouse gas
emissions per capita have attained greater success in manufacturing output (as a
proportion of GDP) and exports than Australia. Figure 18 illustrates the negative
correlation between emission intensity and manufacturing success. Perhaps
counterintuitively, countries that emit less, tend to manufacture more. Australia’s
unusual position in the OECD as a uniquely high-emissions, low-manufacturing
economy is both alarming and puzzling – given the bounty of renewable resources
which we, uniquely among developed economies, enjoy.
Australia thus faces an extraordinary opportunity to embrace and develop our
unmatched renewable energy endowment to power high-value industrial and
technological development. Doing so could make Australia a ‘sustainable
manufacturing superpower,’ as proposed by the eminent economist Ross Garnaut
(2019). This opportunity will be squandered, however, unless Australia quickly
establishes a consistent, stable and comprehensive policy framework to guide
decisions in both the energy and the industrial realms of our economy.
A Fair Share for Australian Manufacturing 54
Figure 18. Manufacturing Success and Carbon Intensity, OECD Nations, 2018.
Source: Nahum (2020).
Several critical policy principles would confirm and accelerate the energy
transformation of Australian manufacturing, thereby helping our industry to make the
most of the renewable energy opportunity before it:
• Australia desperately needs clarity and stability in energy policy, to affirm to all
stakeholders that our commitment to emissions reduction is meaningful,
permanent and consistent with international targets. Even the business sector has
made clear its desire for the federal government to institute a firm Paris-consistent
policy framework, so that businesses can make informed investment decisions that
are subsequently undermined by unexpected changes in policy and politics.
• Governments at the federal, state and local levels can and must play an active role,
partnering with both renewable energy firms and manufacturers to develop
Australia’s sustainable manufacturing potential. These efforts should include:
Australia
Austria
Belgium
CanadaChi le
Czech Republic
Denmark
EstoniaFinland
France
Germany
Greece
Hungary
Iceland
Ireland*
Israel
Ita ly
Japan
South Korea
Latvia
Li thuania
Luxembourg
Mexico
Netherlands
New Zealand
Norway
Poland
Portugal
Slovakia
Slovenia
Spain
Sweden
Switzerland
Turkey
United Kingdom
United States
0
5
10
15
20
25
30
35
0 5 10 15 20
Man
ufa
ctu
rin
g se
cto
r, p
rop
ort
ion
of
GD
P
Carbon dioxide emissions per capita, tons
Trend line
A Fair Share for Australian Manufacturing 55
o Fiscal and investment strategies to accelerate renewable energy initiatives
linked to domestic manufacturing opportunities; these could include fiscal
support for the production and use of renewable energy (eg. through the
Clean Energy Finance Corporation and the Australian Renewable Energy
Agency), direct equity investments and co-investments in new
manufacturing projects, and favourable tax treatment of sustainable
manufacturing investments (such as investment tax credits)
o Provision of public goods to assist these firms to facilitate training for
workers in transitioning industries (noting that the future prosperity of
regional Australia will be tied up in the success of these workers and
businesses)
o Leveraging government procurement to favour domestic manufacturers
who are actively engaged with the renewable energy transition.
• Sector-specific industrial strategies must be developed in key manufacturing
sectors that can benefit from inputs of renewable energy, and/or that can then
provide Australian-made manufactured inputs to renewable energy developments.
Potential sub-sectors which could benefit from such strategies include:
o Primary metal production (including ‘green’ steel and aluminium
production)
o Lithium-ion battery production
o Electric vehicle manufacturing
o Public transit equipment
o Wind and solar generation equipment.
• A key factor in the successful roll-out of renewable energy in Australia will be
upgrading and strengthening transmission and exchange facilities, which have been
badly damaged by years of short-sighted profit-seeking and regulatory failures in
Australia’s largely privatised electricity system.37 Federal and state regulators must
move urgently to facilitate improvements in transmission capabilities and
interconnectivity with spatially decentralised renewable power projects. This will
require greater accountability and long-range planning from private utilities, and
expanded public ownership.
37 See Richardson (2019) for an overview of the economic consequences of Australia’s failed experiment
with electricity privatisation and deregulation.
A Fair Share for Australian Manufacturing 56
• Hydrogen is likely to be a major output from, and input into, manufacturing
processes in years to come—both in Australia and internationally. This is a critical
moment to get the settings right for this future hydrogen industry. Proposals to
develop a hydrocarbon-based hydrogen industry (including with unproven carbon
capture technologies) would not advance the goals of either decarbonisation or
revitalised domestic manufacturing—and Australians would be stuck with huge
sunk costs that would make it even harder to reorient hydrogen production in the
future. Instead, Australia needs policy clarity and targeted government co-
investments in a green hydrogen strategy, with priority placed on maximising the
potential manufacturing spin-offs. Those spin-offs can be achieved both through
greater use of hydrogen in domestic manufacturing processes, and through
maximisation of the domestic manufacturing content in hydrogen projects.
• The expansion of renewable energy supplies for manufacturing will provide many
exciting opportunities for employment and job-creation: both in building and
operating the energy projects themselves, and in the manufacturing industries
which are supported by them (as energy users, and as suppliers of manufactured
inputs to renewable energy projects). However, the employment transitions
associated with the shift to renewable energy must be supported and facilitated
with active measures to avoid job displacements and support regional communities
which have been previously dependent on fossil fuel industries – industries which
are now shrinking, and will continue to do so. These transition supports should
include:
o Planning to locate renewable energy and related projects in regions with
current fossil fuel industries, to make employment transitions into growing
industries more accessible
o Fiscal and regulatory encouragement to locate new manufacturing projects,
tied to renewable energy expansion, in regional areas facing especially
challenging employment situations
o Application of strong standards regarding training and qualifications, labour
standards, job quality, and union representation in renewable power
developments, to ensure that the jobs created there are of high quality
o Generous supports for early retirement, retraining, and relocation for
workers in fossil fuel industries so they can either transition to retirement
or take up alternative career possibilities (including, under our proposals, in
a growing manufacturing industry).
A Fair Share for Australian Manufacturing 57
Making the Most of Our Firms: Size
and Capacity
Another important and limiting feature of Australia’s present manufacturing sector is
the preponderance of very small enterprises, and the failure of those smaller firms to
survive and grow over time. Table 8 provides data on the number of businesses in
Australian manufacturing, by size category. The table compares 2019 to 2007: one year
before the Global Financial Crisis and resulting economic downturn, which marked the
beginning of the sustained downturn in absolute levels of manufacturing output and
employment.
Table 8
Count of Manufacturing Businesses by Size
Zero
employees
1-19
Employees
20-199
Employees
Over 200
Employees Total Firms
2019 38,430 40,998 6,513 487 86,428
Share
Total 44.5% 47.4% 7.5% 0.6% 100.0%
2007 41,182 44,177 10,191 756 96,306
Change,
2007-2019 -6.7% -7.2% -36.1% -35.6% -10.3%
Source: Author’s calculations from ABS Catalogue 8165.0. Data as of June each
year.
As of June 2019 there were over 86,000 registered businesses operating in the
manufacturing sector. The total number of firms has declined by almost 10,000 since
2007. It might seem impressive that there are that many firms still active in this vital
part of our economy. However, the large absolute number of manufacturing
businesses belies a profound weakness in the structure and capacity of those firms.
Almost half of those firms (47%) have less than 20 employees (and three-fifths of those
had less than four employees). Another 45% of manufacturing firms had no employees
at all: only the proprietor, often running an unincorporated business, often from their
own home. Only 7.5% of all manufacturing businesses fell into the ‘middle sized’
category: some 6,500 firms, with employment between 20 and 200 workers.
Meanwhile, less than 500 companies (0.5% of all manufacturing firms) had over 200
A Fair Share for Australian Manufacturing 58
employees. So the overwhelming majority of manufacturing businesses are very small,
with few if any employees. That inevitably limits their capacity to undertake
innovation, invest in sophisticated capital equipment, and try to sell their products into
export markets.
Worse yet, the contraction in Australian manufacturing over the past decade has been
felt most severely by medium-sized enterprises. The number of firms with 20-200
employees fell by 36% between 2007 and 2019. Almost 3700 medium-sized businesses
disappeared. The number of larger manufacturers also fell by over one-third. In
contrast, solo shops (with no employees) and those with a handful of employees
managed experienced less dramatic decline over the last decade: the count of these
very small firms declined by about 7% since 2007. As a result, the industrial structure
of the industry which remains today (after a decade of contraction) is even more
fragmented across very small businesses, with limited technological and export
capacities.
In discussing the importance of research, innovation, and entrepreneurship to
Australia’s future economic development, much attention naturally focuses on the
potential of new start-up companies to lead future growth and job-creation. For
example, in announcing a new Business Growth Fund (funded partly by government
and partly with initial investments from major banks), the Commonwealth government
pledged to foster the creation of 250,000 new small and family-run businesses over
the next five years (or an average of 50,000 per year).38 Curiously, there are routinely
about 350,000 new businesses formed in Australia every year – the vast majority of
which have no employees. There are also almost 300,000 businesses which disappear
every year. So the pledge to help facilitate another 50,000 new business formations
each year may have no visible impact on the national economic trajectory at all.
To be sure, starting new businesses represents an important vote of confidence and
optimism in the future. However, it is hard to argue that manufacturing is being held
back by a shortage of start-up businesses or entrepreneurial energy. Indeed, about
10,000 new businesses are created in the sector each year – but almost all of those
new firms have few if any employees. And less than half of them survive their first five
years of operation.
The bigger structural problem facing businesses in manufacturing is the failure of small
businesses to survive and grow – to become larger, more capable firms with the
potential to innovate, accumulate capital, adopt new technologies, boost productivity,
and sell into export markets. Comparative international studies have confirmed that
38 See Koehn (2019).
A Fair Share for Australian Manufacturing 59
the presence of a vibrant economic ‘ecosystem’ of growing, innovation-intensive
medium-sized enterprises is vital to international success in specialised advanced
manufacturing. For example, the continuing success of Germany’s medium-sized
industrial sector (commonly called the Mittelstand) reflects effective management,
generally cooperative and participatory industrial relations, strong vocational training
and jobs pathways, and openness to innovation and export opportunities.39 Other
successful manufacturing countries with vibrant medium-sized industrial ecosystems
include Switzerland, Austria, Sweden, Korea, and Japan. In many cases these mid-level
firms cooperate in rich networks which share information and experience around new
technologies, training and apprenticeship systems, and other mutually beneficial
practices. Networks of mid-sized firms also develop mutual relationships with the
larger firms which have outsourced work (to design and produce various inputs and
sub-assemblies) to a whole community of capable, dynamic suppliers.
Australia’s declining population of mid-sized industrial firms, and the inadequate
capacity of those businesses to innovate, export, and grow, poses a major challenge to
the future revitalisation of domestic manufacturing. A key focus of future policy
interventions must therefore be providing mid-sized manufacturers with support of all
kinds (including sources of long-term capital, innovation and research support, and
partnerships to increase exports) to help them survive and grow. This focus on
nurturing medium-sized firms is reflected in the recommendations discussed later in
this report.
Management expertise is another area in which Australian manufacturing businesses
must lift their performance. International economic evidence confirms that
management knowledge and technological capacity is a critical factor in explaining lags
(relative to global leaders) in total factor productivity performance.40 And qualitative
and quantitative data indicate that the education level, technological expertise, and
leadership qualities of Australian managers lag behind those of their peers in countries
with superior productivity and innovation performance.41 Investments in management
training, leadership development, and faster diffusion of technical and economic
knowledge among top managers and executives may be among the most cost-efficient
of strategies for enhancing the capabilities of Australian manufacturing enterprises in
the future.
39 Audretsch and Lehmann (2016) provide a recent account of the flexibility and enduring success of the
German mid-sized industrial sector. 40 Recent evidence is provided by Andrews et al. (2015), and Iacovone and Crespit (2010). 41 See Green et al. (2009) for a representative analysis.
A Fair Share for Australian Manufacturing 60
A ‘Fair Share’ for Manufacturing
Renewal
As noted above, Australia incurs a large and chronic trade deficit in manufactured
products: with manufactured imports currently exceeding our exports by $180 billion
per year. Our imports of elaborately transformed manufactured goods (the most
sophisticated, technology-intensive products) overwhelm our exports by a 6-to-1 ratio.
Australia produces far less manufactured output than we consume.
Table 9
Australian Apparent Consumption of Manufactures
2017-18, $billion
Domestic Output 381.8
Exports 85.5
Imports 267.4
Apparent Consumption 563.7
Domestic Output as Share Consumption 68%
Source: Author's calculations from ABS Catalogue 8155.0 and DFAT
TRIEC data.
An indication of this imbalance between our use of manufactured goods, and our
production of them, is provided by the analysis in Table 9. According to the Australian
Bureau of Statistics, the domestic manufacturing sector produced and sold just over
$380 billion worth of output in 2017-18 (most recent year for which this data is
available). Of that total, some $85 billion was destined for export markets –
representing about 22% of total production.42 That is a relatively smaller degree of
export dependence than typical of the manufacturing industries of other, relatively
42 Some analysis measures export intensity as the ratio of manufactured exports to the sector’s value-
added (around $105 billion), rather than shipments, and this would imply a much higher export
orientation. That comparison, however, is invalid, because the total shipment value of a manufactured
product includes a significant quantity of value-added produced in other sectors, and then supplied as
inputs to manufacturing. Value-added within manufacturing thus represents only a small share (under
30%, according to the ABS input-output tables) of total manufacturing output. International trade
statistics report the gross value of traded manufactures, not their value-added, so export intensity
should be measured as the ratio of (gross) exports to the sum of (gross) output.
A Fair Share for Australian Manufacturing 61
small industrial economies. Indeed, according to comparable OECD data for 2015
(most recent available), the export share of total manufacturing output was smaller in
Australia than almost any OECD economy.43 This relatively small share of exports in
manufacturing output is partly due to the disappearance of many globally-oriented
manufacturing activities (such as motor vehicles) from Australia over the past
generation. It also reflects other negative pressures (including one-sided trade deals
and currency fluctuations) which also discouraged manufacturing exports from
Australia. As a result, the manufacturing sectors which were better able to retain a
foothold in Australia (such as food processing and building materials) are those sub-
sectors which are oriented most closely around the domestic market.
The amount of domestic manufacturing output which is not exported (about $300
billion in 2017-18), can then be added to the gross inward flow of imported
manufactures ($267 billion in the same period), to generate an estimate of total
Australian purchases of manufactured products. On this logic, we estimate that $564
billion in manufactured goods was purchased in Australia that year. That represents
our domestic consumption of manufactured products. Note that our total purchases of
manufactures equal about 30% of national GDP. The share of manufactured goods
purchases in total GDP is much higher than the share of manufacturing value-added in
GDP (around 7%) because of two factors:
• Manufacturing purchases embody a great amount of value-added produced in
other sectors of the economy, not within manufacturing itself
• A large share of Australian purchases of manufactured goods is imported.
By comparing Australian output of manufactured products to Australian use of
manufactured products, a broad measure of the degree of self-sufficiency of Australia
with respect to manufactured products can be developed. On this basis, as
summarised in Table 9, in 2017-18 Australia produced only 68 cents of manufacturing
output for every $1 which we collectively purchase. That large imbalance between
output and use (equivalent to the size of the manufacturing trade deficit) confirms that
Australia has a disproportionately small share of the good jobs, incomes and
innovation possibilities associated with manufacturing.
Relative to other industrial countries, Australia’s unusually small manufacturing sector
ranks as an extreme outlier. In fact, using comparable international data for 2015
(most recent available) from the Organization for Economic Cooperation and
Development, it is clear that Australia’s very weak degree of manufacturing self-
sufficiency is in fact the lowest of any of the OECD’s 36 member countries. Table 10
43 Author’s calculations from OECD ‘Statistics on Trade in Value Added.’
A Fair Share for Australian Manufacturing 62
Table 10
Manufacturing Self-Sufficiency, OECD Countries, 2015
Gross Manufacturing Output ($US b)
Ratio of Manufactured
Imports/Exports
Manufacturing Trade Balance
($US b)
Self-Sufficiency Ratio
Ireland1 $215.4 0.30 $109.4 203.2%
Germany $2,013.9 0.61 $347.1 120.8%
Luxembourg $12.6 0.73 $2.1 119.7%
Netherlands $329.5 0.67 $51.5 118.5%
Korea $1,467.0 0.55 $227.4 118.3%
Switzerland $334.4 0.78 $40.5 113.8%
Hungary $99.9 0.84 $10.9 112.2%
Sweden $203.0 0.78 $21.8 112.0%
Finland $117.1 0.77 $11.3 110.7%
Czech Rep. $169.4 0.83 $16.1 110.5%
Slovenia $26.3 0.86 $2.3 109.8%
Italy $995.5 0.75 $85.4 109.4%
Austria $194.3 0.85 $15.2 108.5%
Slovak Rep. $79.9 0.88 $6.0 108.2%
Denmark $100.5 0.87 $7.1 107.6%
Iceland $6.6 0.88 $0.5 107.5%
Belgium $236.3 0.88 $15.0 106.8%
Japan $2,616.5 0.77 $115.8 104.6%
Lithuania $21.3 0.94 $0.6 103.1%
Israel $110.4 0.93 $2.9 102.7%
Portugal $90.4 0.95 $2.1 102.3%
Spain $613.7 0.97 $6.2 101.0%
Poland $302.7 1.00 -$0.5 99.8%
France $802.4 1.07 -$23.0 97.2%
Estonia $12.3 1.06 -$0.4 96.6%
Mexico $699.7 1.11 -$30.2 95.9%
New Zealand $64.1 1.16 -$3.5 94.8%
Turkey $483.8 1.32 -$38.2 92.7%
U.S. $5,744.5 1.77 -$711.4 89.0%
Canada $596.0 1.35 -$74.4 88.9%
Greece $57.9 1.55 -$10.2 85.0%
U.K. $744.3 1.59 -$149.8 83.2%
Latvia $9.2 1.46 -$2.0 82.2%
Norway $100.1 2.08 -$30.8 76.5%
Chile $83.5 2.33 -$27.5 75.2%
Australia $269.2 2.76 -$107.2 71.5%
Source: Author's calculations from OECD, 'Statistics on Trade in Value Added'. 1. Irish data regarding value-added and trade flows suffers from well-known measurement and comparability
problems arising from the large impact of intra-corporate transfers by multinational enterprises, so these figures (and Ireland’s top ranking in the table) should be interpreted with caution.
A Fair Share for Australian Manufacturing 63
reports gross manufacturing output for each country, the ratio of manufactured
imports to exports, and the resulting trade balance in manufactured products.44
Of the 36 countries listed in Table 10, 22 produce more manufactured output than
they consume – hence resulting in self-sufficiency ratios in excess of 100%. This group
includes well-known manufacturing ‘success stories,’ such as Germany (121%), the
Netherlands (119%), Korea (118%), Switzerland (114%), Sweden (112%), Finland
(111%), Belgium (107%), and Japan (105%). The experience of these countries confirms
that the goal of producing at least as much manufactured output as a country
consumes is not a ‘pipe-dream’: it is in fact a normal state of affairs, even for higher-
wage industrial economies. Pseudo-economic arguments that countries like Australia
are somehow ‘not suited’ for manufacturing are false.
Australia ranks at the bottom of Table 10, with manufacturing self-sufficiency of just
71.5%.45 That places Australia even below Chile and Mexico, semi-developing countries
with limited industrial and technological capabilities. The common idea that
manufacturing ‘naturally’ migrates away from higher-wage developed economies is
disproven by the fact that most other industrialised countries have retained
proportional (or even disproportionately large) manufacturing industries.
In terms of international trade, Table 10 also indicates that the ratio of Australia’s
manufactured imports to its manufactured exports (almost 3-to-1) is higher than for
any other OECD country. Our uniquely and precariously unbalanced international trade
relationships in manufactured goods are thus a key factor behind our
disproportionately small manufacturing sector.
Because manufactured products are specialised, and usually demonstrate strong
economies of scale (such that production at small volumes is often unviable),
participation in two-way international trade is essential to the viability of most
manufacturing sectors. The goal of industrial strategy is not to become self-sufficient in
any autarkic sense: that is, adopting a ‘do-it-yourself’ attitude to every single product
we use (although in some cases, like nationally strategic products, it is essential that
44 Due to definitional differences and exchange rate adjustments the data for Australia in Table x differ
from figures reported above for Australian output and trade, but the estimated level of self-sufficiency
is similar. 45 The difference between the estimates of Australia’s self-sufficiency ratio in Table 9 (68%) and Table 10
(71.5%) reflect the different timing of the relevant data (2017-18 for Table 9, versus 2015 for Table 10)
and slight definitional differences between the Australian data (Table 9) and the OECD data (Table 10).
A Fair Share for Australian Manufacturing 64
Australia be capable of producing necessary machinery and supplies46). Rather, a more
reasonable goal would be to work towards a domestic manufacturing sector that is
broadly proportionate to the size of our purchases of manufactured products. To be
sure, our exports would still reflect a stronger-than-proportional presence in particular
sub-sectors – presumably for products in which Australian firms have particular
advantages (related to cost competitiveness, availability of key inputs, proprietary
technologies, energy intensity, etc.). And our imports would reflect a relative lack of
domestic presence or capability in certain sub-sectors. Broadly balanced two-way
trade in manufactures would facilitate that useful process of mutual specialisation. But
across the entire portfolio of manufactured products, Australia would retain a level of
manufacturing output and employment that was broadly proportional to the scale of
our national needs.
On this basis, we define a ‘fair share’ as being a level of total manufacturing output
comparable to Australian use of manufactured products, in aggregate value terms. By
that definition, Australian manufacturing output would need to grow by close to half.
Since in 2017-18 we produced barely two-thirds as much manufactured output as we
consume, domestic output would need to expand by 47% to reach a level compatible
with Australia’s collective purchases of manufactures.
That is an ambitious long-term goal. It would require consistent alignment of several
powerful policy levers to re-energise manufacturing investment, innovation, output,
employment and exports. And the benefits of stronger manufacturing production
would flow through to many other economic indicators, as summarised in Table 11.47
Total manufacturing output would need to grow by close to $180 billion to attain that
‘fair share’ benchmark. That would translate into $50 billion in new value-added –
representing a 2.5% increase in national GDP. Over 400,000 direct jobs would be
created in manufacturing, supporting some $30 billion per year in additional wages
and salaries. Another 265,000 jobs would be created in the various supply industries
which would experience new sales opportunities as a result of the increase in domestic
manufacturing. Those new supply chain purchases would be worth an estimated $115
billion per year. Cautiously assuming the same export intensity of current
manufacturing production, exports of manufactured product would grow by around
$40 billion. However, that estimate is conservative: in reality, improving Australia’s
access to and success in international markets will be necessary in order to attain a
46 The potential shortages of essential medical equipment and supplies during the COVID-19 pandemic
provide a timely reminder of the importance of strategic and national security factors in industry policy
formulation. 47 The gains reported in Table 11 are estimated on the basis of prevailing relationships between
manufacturing output, employment, exports, and supply chain purchases.
A Fair Share for Australian Manufacturing 65
‘fair share’ manufacturing footprint, and hence the increment in exports would likely
be significantly larger than this.
Table 11
Benefits of a Fair Share Manufacturing Plan
Increases Resulting from
‘Fair Share’ Proportional Production
$/year
or jobs
Manufacturing Sales $181.9 billion
Direct Value-Added $50.0 billion
Direct Jobs 424,000
Direct Wages $29.5 billion
Input Purchases $114.7 billion
Supply Chain Jobs (000) 265,000
Exports $40.5 billion
Source: Author's calculations from ABS Catalogues 8155.0; 5209.0.55.003;
5206.0; 6291.0.55.003; and DFAT TRIECD data.
In short, the attainment of a proportional presence for manufacturing production in
Australia, in line with our own needs for manufactured goods, would generate a wide
range of economic benefits: for output, for employment, for incomes, and for our
international balance of payments. This is not a goal that can be attained overnight,
and it will require a determined, consistent, multi-dimensional effort by all
manufacturing stakeholders to make it happen. But it is not unrealistic to suppose that
Australia could achieve a fair share of the benefits of modern manufacturing, in line
with our overall purchases. And it is not unreasonable to expect – as do most other
industrial countries – that Australians should be able to participate proportionately in
this important and dynamic sector of the modern economy.
A Fair Share for Australian Manufacturing 66
Principles for Modern Industry
Policy
Manufacturing has a strategic importance that extends throughout the economy:
anchoring innovation, productivity, and exports. But Australia’s economic history
confirms we cannot assume that global markets and private business decisions alone
will ascribe to us a fair share of opportunity in this vital sector. Rather, pro-active
policy attention and dedicated resources are required to nurture a viable and
successful manufacturing sector, and achieve a ‘fair share’ of the resulting jobs,
output, and benefits.
The spill-over benefits from a strong manufacturing sector into the rest of the
economy motivate and justify focused efforts by government to stimulate
manufacturing investment and production. The positive externalities of a vibrant
domestic manufacturing sector represent a healthy economic and social return to
investments made by government in supporting manufacturing investment,
innovation, employment, and exports. Modern economic theory recognises these
externalities, in explaining why governments should indeed legitimately intervene in
markets to expand the domestic footprint of desirable, strategic industries. Strategic
industries are those with the positive qualitative characteristics identified above:
export orientation, innovation intensity, strong supply chains, and superior
productivity and income potential. Conventional assumptions that government should
steer clear of pro-active efforts to nurture specific desirable industries (often derided
as ‘picking winners’) have been refuted by modern theoretical and empirical research,
which has confirmed the benefits of well-designed sector development strategies.48
Once it is accepted that government has legitimate authority and rationale to actively
stimulate a larger domestic manufacturing sector, the challenge becomes to identify
the necessary policy tools and levers to facilitate that effort. There are several general
principles of policy intervention that guide the overall effort to revitalise
manufacturing. Specific applications must then consider the details of particular
products, technologies, and sub-sectors.
48 Influential examples of recent research confirming the benefits of strategic sector-focused
development policy interventions include Stiglitz, Lin and Monga (2013), Rodrik (2008), and Mazzucato
(2013).
A Fair Share for Australian Manufacturing 67
These are the general principles of modern sector development policies. They can all
be invoked in a multi-dimensional strategy to lead Australia’s manufacturing sector
back toward a proportionate and healthy economic footprint:
Sector Strategies: Government needs to identify those manufacturing sub-sectors with
the right criteria and best chances for success, and then co-ordinate its interventions
with other sector stakeholders for maximum impact on investment and growth. These
sector strategies must engage all relevant sector stakeholders: businesses, workers
and their unions, educational institutions, research organisations, state and local
governments. Even businesses which compete with each other can benefit when the
whole sector succeeds. The Commonwealth government’s NCCC process has already
identified several promising targets for this type of focused attention (including food,
rare earths processing and manufacturing, biotech, and defence equipment). Other
specialised sub-sectors are also good candidates: such as carbon and advanced
materials, medical equipment and devices, renewable energy equipment and
technology, and lithium battery technology and applications.
Domestic Content in Public Procurement: Australian governments are massive
purchasers of manufactured goods. Governments buy manufactured products for
many purposes: including for infrastructure projects (in transportation, utilities, and
other public facilities), major specialised equipment purchases (such as submarines
and railway rolling stock), and to support public services like health care and education
(which also need regular purchases of manufactured inputs). Estimates of total annual
procurement purchases by Australian government range between $100 and $200
billion per year, or up to 10% of national GDP;49 much of that spending is on
manufactured products. An obvious way to support domestic manufacturing is to
ensure those expenditures generate the maximum possible boost to domestic
industry. A strong ‘Buy Australia’ program can even help to reduce the final net cost of
procurement purchases. Since governments collect additional revenues through new
economic activity spurred by domestic procurement purchases, a share of that initial
public expenditure is offset by greater inflows of tax revenue. Other countries regularly
utilise domestic content targets in procurement to support domestic producers; the
U.S. is particularly effective (despite its supposed commitment to ‘free markets’) in
directing public sending to benefit U.S. manufacturing firms (through Buy America
rules, defence procurement, Department of Energy grants, and more). Australia can
clearly do the same, even within the (limited) constraints imposed by existing trade
agreements. Domestic procurement strategies and rules are being utilised in
Australian defence and shipbuilding contracts, but they need to be stronger. And the
same logic should be applied to other procurement decisions (including in
49 See Stanford (2018), pp. 31-34 for discussion and estimates.
A Fair Share for Australian Manufacturing 68
construction, transportation, and technology projects). In addition to a ‘Buy Australia’
commitment to purchase more domestic manufactures, procurement decisions must
also set ambitious requirements for supporting medium-sized businesses, hiring
qualifying apprentices, and extending employment opportunities to hard-hit segments
of the labour market (including women in non-traditional roles, Indigenous Australians,
linguistic and cultural minorities, and workers with disability).
Networks, Eco-Systems, and Clusters: Successful modern industrial policy relies
centrally on connections and collaboration among different firms, agencies, and
stakeholders. Research shows that spill-overs across these diverse sector participants,
and the sharing of knowledge between them, are crucial to the development of
‘critical mass’ in any high-tech industry. Often, these networks and clusters are
geographically concentrated. Government cannot simply ‘create’ clusters, but it can
facilitate their emergence: with support for concentrated ‘hubs’ of research,
commercialisation, and training; partnering between industry clusters and key public
institutions (including universities, TAFEs, and CSIRO centres), and seed capital to help
establish networks and joint ventures in identified priority sub-sectors.
Innovation: Empirical evidence shows successful innovation must be embodied in a
hands-on process of ‘learning by doing’; it cannot occur solely, in abstract, in the
controlled conditions of a laboratory. And there is no other sector more directly
connected to the practical innovation process than manufacturing. Government needs
to provide tangible, direct support to innovation in manufacturing. We need better
systems for linking public innovation activity with commercial applications. We need
more effective fiscal supports for industrial innovation efforts, that reward Australian
research and commercialisation more directly and powerfully. And we can emulate
successful public equity investments in innovation-intensive businesses in other
countries (like the effective methods for financing innovative firms used in Israel,
Finland, and Ireland).
Targeted Fiscal Supports for Investment: International and Australian experience has
shown that no-strings-attached company income tax cuts for corporations do not
strongly stimulate new investment, innovation, or employment. Rather, fiscal
incentives are more effective when they are linked directly to incremental investment
decisions. Only companies which invest concretely in Australian capital (including
machinery, equipment, technology, and intangible capital) should be rewarded
through fiscal incentives. Examples of fiscal measures which are conditional on
incremental investment include accelerated depreciation provisions (allowing
companies to write off the cost of new investments faster), investment tax credits, and
public co-investments in specific strategic projects.
A Fair Share for Australian Manufacturing 69
Industrial Infrastructure: Government investments in public capital assets of all kinds
are critical in fostering manufacturing growth. Infrastructure investments help to offset
the sustained weakness of private investment, and to improve weak macroeconomic
conditions. They will be especially important in coming years as the Australian
economy tries to rebuild after the COVID-19 pandemic and associated recession. One
key focus of infrastructure investment should include facilities and services which
support manufacturing: ranging from transportation infrastructure, to utility
connections (like transmission upgrades related to renewable energy), to modern
training facilities (to better integrate TAFE and university training with industry). As
always, we should maximise the use of Australian-made manufacturing content in
those (and all other) infrastructure projects.
Mobilising Capital: As discussed above, medium-sized companies in Australia’s
manufacturing sector have suffered the biggest decline over the past challenging
decade; their constrained access to sources of long-term, ‘patient’ capital is a key
factor in their inability to survive and grow. International experience confirms there
are many ways that public and social pools of capital can leverage investment and
development in targeted sectors. These include placements by state-owned
development banks (as in Japan and Korea) or other forms of sovereign wealth (as in
Singapore, the UAE, and Norway). Public investment vehicles have been used
successfully — indeed profitably — in numerous applications in Australia (for example,
the CEFC’s important role in accelerating sustainable energy projects). The same
principles can apply in manufacturing investment. Additionally, industry super funds
could play a larger role in financing the development of strategic products and sectors,
including specialised financial vehicles to assist in channelling capital to medium-sized
firms. Government pressure and regulation could also facilitate greater attention by
private financial institutions to providing more accessible sources of capital for
medium-sized manufacturing firms.
Leveraging Energy: Manufacturing requires energy. And manufacturing facilities have
always been located to take advantage of accessible energy sources: from water-
powered mills in the early years of the Industrial Revolution, to the attraction of coal-
fired electricity in Australia’s initial postwar industrialisation. What has changed, of
course, is the source and geography of energy. Thanks to Australia’s superabundance
of renewable resources, and the rapid decline in the cost of that energy (discussed
above), renewable energy will be a powerful new lever for attracting new
manufacturing investment to Australia. This potential advantage must be accelerated
in coming years, and supportive and consistent policy can play a crucial role: including
fiscal incentives for renewable energy investments, upgrades in transmission and
electrical infrastructure to facilitate expanding renewable sources, and a steady
A Fair Share for Australian Manufacturing 70
commitment to meeting our targets for emissions reduction and eventually attaining
net-zero emissions status.
Skills and Capacities: Enhancing the future skills and capacities of workers must be a
vital component of future sector strategies. Consistent funding for skills training at all
levels is essential, as are efforts to more closely link training programs with future
workforce needs in strategic sectors. As described above, the crisis in Australia’s
vocational education and training system will hold back a renaissance in domestic
manufacturing, without urgent attention and repair. Other countries (such as
Germany) have been far more successful in linking vocational training investments to
manufacturing job pathways, and leveraging top-quality training as a vital asset in
advanced manufacturing. A plan to reconstruct Australia’s crisis-ridden vocational
training system must start with major investments to restore and upgrade the physical
infrastructure and teaching capabilities of the TAFE system. The clear majority of public
training funds must be channelled through public providers (and the TAFE system,
more specifically). New collaborative vocational training initiatives can better link
TAFEs with the specific needs of particular manufacturing clusters and firms.50
Manufacturers must be pushed to utilise more apprentices (including through
apprenticeship targets in publicly-funded infrastructure and procurement projects),
and rewarded for doing so with appropriate fiscal supports.
Trade that Goes Both Ways: International trade is essential to the viability of most
manufacturing, due to the importance of economies of scale in production and the
specialised nature of both products and markets. But Australian trade negotiators
need a very different strategy to unlock the potential of mutually beneficial trade in
manufactures. Their past reliance on simple-minded tariff reduction and ‘cookie-
cutter’ free trade deals has clearly done more harm than good to domestic
manufacturing. We need trade arrangements with other countries that make access to
Australian markets conditional on comparable purchases of Australian-made output,
or other measures (such as domestic offsets or joint-venture production
arrangements) to stimulate exports of Australian-made manufactured products. And
Australian trade agencies (like Austrade) can be much more proactive in promoting
Australia’s exports, through initiatives like expanded credit financing, initiatives to
leverage Australian participation in global supply chains, and government support for
international marketing. Support for export promotion must be especially focused on
medium-sized enterprises, which are critical to our ecosystem of innovative advanced
50 A good example of this synergy between cluster development and training is the emerging
concentration of carbon fibre and material manufacturing in Victoria, linked closely to specialized
industrial training programs at Deakin University and other institutions.
A Fair Share for Australian Manufacturing 71
manufacturing, but which face formidable financial and logistical barriers to
developing international markets for their output.
* * * * *
A thriving manufacturing sector confers important benefits across the whole economy.
Even more importantly, a large and flexible manufacturing sector enhances our
national security and resilience – including in the face of unpredictable crises, such as
COVID-19. By ensuring we have the national capacity to produce essential supplies and
equipment (from medical supplies, to military equipment, to renewable energy
technologies), a revitalised manufacturing sector strengthens our economic, social,
and geopolitical well-being. We can and must build a manufacturing sector that is
economically and ecologically sustainable, and that adds complexity and resilience to
Australia’s economy.
This catalogue of broad policy levers confirms that governments have ample capacity
to strengthen Australian manufacturing, and work towards a situation whereby
Australian once again possesses a domestic manufacturing base that is proportionate
to our needs. The main issue is whether our governments have the political will to
make that goal a national priority – or whether they will continue to be influenced by
outdated and discredited assumptions that Australia can prosper on the basis of
resource extraction alone.
A Fair Share for Australian Manufacturing 72
Action Plan: Six Immediate
Priorities for Industrial
Rejuvenation
The preceding section described the main policy tools in the overall toolbox of modern
industry policy. Instead of passively accepting Australia’s presently unbalanced and
underdeveloped role in the global economy, government has the capability to foster
an all-round revitalisation of domestic value-adding manufacturing activity. The policy
levers identified above – sector planning and strategising, active government
procurement, better vocational training, improved access to capital, leveraging
Australia’s energy resources, and rethinking international trade policy – will all need to
be part of an over-arching effort to restore manufacturing and attain a ‘fair share’ of
its benefits for Australians. By implementing a multi-dimensional, internally consistent
policy strategy, featuring both ‘carrots’ and ‘sticks’, government can enhance the
incentive to invest in domestic manufacturing, nurture strategic sectors and sub-
sectors, and establish a positive momentum for this vital sector.
Of course, every major change has to start with incremental steps. A holistic strategy
to achieve a ‘fair share’ manufacturing renaissance cannot simply be willed into
existence with a magic stroke. To provide a start to this larger, long-lasting
reorientation of manufacturing policy, we identify here six promising incremental
measures that would make an immediate difference to the prospects of domestic
manufacturing. This short-list of measures thus constitutes a ‘down payment’ on the
bigger, broader efforts required to achieve a more proportionate domestic
manufacturing industry in Australia. And by moving quickly to start that industrial
renewal, government can also ensure that manufacturing makes its maximum possible
contribution to the coming post-COVID reconstruction of Australia’s economy.
1. Establish a network of Advanced Manufacturing Sector Councils, supported by a
broad infrastructure and secretariat at the Department of Industry, Science, Energy
and Resources, to:
a. Identify the most promising sub-sectors of Australian manufacturing
b. Engage stakeholders in each sub-sector
c. Develop investment and innovation plans
A Fair Share for Australian Manufacturing 73
d. Oversee implementation of these plans, supported by other agencies
described below.
2. Capitalise a new Advanced Manufacturing Investment Fund, with $1 billion in
initial Commonwealth share capital, to make strategic equity investments in new
projects identified and developed as part of the Advanced Manufacturing Sector
Councils, with a special focus on access to finance for medium-sized manufacturing
enterprises.
3. Establish a Manufacturing VET Policy Board, composed of leadership level
executives from manufacturers, trade unions, TAFEs, federal and state
governments, and other relevant stakeholders, to identify and begin implementing
immediate measures to develop a more coherent and constructive framework for
manufacturing VET.
4. Implement an Australian-Made Medical Equipment Strategy, that would:
a. Designate essential medical equipment and supplies as being of strategic
importance to national security
b. Set priorities for fostering made-in-Australia production of key categories of
equipment over 1-year and 5-year timetables
c. Establish procurement rules for publicly-funded health facilities and
services, to transition their purchases to suppliers complying with the
strategy.
5. Establish a Buy Australian Infrastructure Council, with representatives from the
federal and state governments, supported by Infrastructure Australia, that would:
a. Compile catalogues of publicly-funded infrastructure projects
b. Work with project sponsors to develop expected supply timetables for
purchases of manufactured inputs to those projects
c. Set targets for domestic Australian content in overall procurement
purchases
d. Work with project sponsors to monitor and report on domestic
procurement performance.
6. Implement accelerated depreciation provisions in the federal corporate income
tax code, to foster faster investment spending by Australian-based manufacturing
firms, including:
A Fair Share for Australian Manufacturing 74
a. 100% depreciation rate for intellectual property and advanced
manufacturing machinery
b. 50% depreciation rate for other machinery and equipment.
These six measures could not, on their own, achieve the fulsome and lasting renewal
of manufacturing envisioned in the ‘fair share’ benchmarks defined and described
above. Achieving that bigger transformation of manufacturing will require a powerful,
multi-dimensional and sustained set of policy interventions: including in tax and fiscal
policy, redesigning trade agreements, transforming the VET system, and fostering a
new culture of applied innovation among Australian manufacturing firms.
But this short-list of immediate, practical steps would constitute an important step in
the right direction. Together, they would directly achieve an incremental improvement
in the sector’s investment, innovation and training performance. Perhaps most
importantly, they would help to develop a new sense of multi-partite commitment and
cooperation, that will be essential to subsequent work to define and implement a
broader policy agenda for achieving a ‘fair share’ of manufacturing. Implementing
these six immediate actions would show Australians that the primary stakeholders in
manufacturing can come together, identify key actionable policy priorities, build
effective working relationships, and start to shift the trajectory of our long-neglected
and underdeveloped industrial base.
A Fair Share for Australian Manufacturing 75
Conclusion
Australia’s manufacturing sector has experienced a very challenging decade. Its
economic footprint (measured by output, employment, and investment) has
diminished. It confronts a vastly unbalanced international trade arena, hamstrung by
misguided policies that have encouraged imports far more than promoted exports. It is
held back by a litany of other flawed policy experiments: in vocational education,
innovation policy, and energy and climate policy. Perhaps most damagingly, it has
been taken for granted by governments and leaders, who were falsely convinced that
Australia doesn’t need the capacity to ‘make stuff’ anymore. Instead, we should simply
rely on the mineral wealth buried beneath our feet … along with a few other industries
that are equally dependent on our natural endowment (like tourism and food) to pay
our way in the global economy. That complacency has left Australia with the most
under-sized manufacturing industry of any industrial country in the world.
Given these daunting obstacles, it is remarkable that Australian manufacturing has
survived at all – yet it continues to make an outsized contribution to Australia’s
economic prosperity and potential. It is the most vital source of innovation. It accounts
for disproportionate shares of capital investment, exports, and decent full-time jobs. It
anchors a supply chain worth hundreds of billions of dollars of annual sales of parts,
supplies, materials and services. Its benefits spread across all states, and are especially
important in anchoring regional communities. The continuing resilience of this sector,
despite a disastrous decade, is testament to the tenacity and talents of manufacturing
workers, businesses, educators, and innovators.
There are many reasons for Australia to accept the need for deep change in our
approach to industrial policy – and to implement that change quickly and powerfully.
The economic and environmental limits to resource extraction as a base for prosperity
are becoming more apparent and binding. The social consequences from the erosion
of decent working-class jobs are causing political and cultural ferment in many of our
communities. Most recently, the COVID-19 pandemic and resulting recession has
highlighted that Australia must retain the capacity to produce a full range of
sophisticated manufactured goods and equipment. The COVID recession has also
created an economic void – with mass unemployment and idle capacity – that can be
partly filled in coming years by a resurgent manufacturing sector.
Australia has proven in the past that it can be a global manufacturing leader, despite
our small population and geographical remoteness. It didn’t happen by accident, nor
was it the result of automatic market forces and private business decisions. It
A Fair Share for Australian Manufacturing 76
happened because Australians made it a national priority. We wanted an economy
that was diversified and sophisticated, and less subject to the vagaries of international
commodity prices and shifts in foreign appetites for our various resource-based
staples.
At present Australians are fighting a war: a war against infection and disease. Like
previous wars, we are committing vast economic and human resources, and making
enormous sacrifices to ensure that we win. After the last global war that Australia
fought, in the 1940s, our government designed and implemented a National
Reconstruction Plan to ensure the economy did not slip back into Depression. That
Plan was set in motion years before the end of hostilities: by late 1942 a new
Department of National Reconstruction had already been established, and plans were
being readied for a post-war mobilisation of economic resources to create jobs and
build new industries.
Manufacturing played a central role in that post-war reconstruction effort.
Government placed top priority on building national industries, including high-
technology sectors (like automotive, aerospace, and aluminium production) that had
been previously absent from our remote, resource-based economy. Thanks in large
part to that ambitious, well-resourced effort, Australia experienced a remarkable
industrial transformation – and entered an unprecedented three-decade period of
vibrant, inclusive growth.
We believe that similar potential exists today, for a renewed manufacturing industry to
play an equally central role in the post-COVID reconstruction of Australia’s economy.
For many reasons, the old recipes of resource extraction and business-led growth are
clearly inadequate to the challenges of the present moment. We have described a goal
– ensuring that Australia produces a ‘fair share’ of manufactured output,
proportionate to our (growing) needs for manufactures – that would generate
enormous benefits flowing to all parts, and all sectors, of Australia’s economy. And we
have catalogued the rich range of policy tools and levers that are available to achieve
that goal. What is now needed is for policy-makers to pick up those tools, and use
them.
A Fair Share for Australian Manufacturing 77
References
Advanced Manufacturing Growth Centre (2017). Sector Competitiveness Plan 2017:
Taking Australian Ingenuity to the World (Sydney: Advanced Manufacturing Growth
Centre), https://www.amgc.org.au/wp-content/uploads/2018/11/Sector-
Competitiveness-Plan-1.pdf.
Advanced Manufacturing Growth Centre (2018a). Advanced Manufacturing: A New
Definition for a New Era (Sydney: Advanced Manufacturing Growth Centre),
https://www.amgc.org.au/wp-content/uploads/2018/11/Advanced-Manufacturing-a-
new-definition-for-a-new-era.pdf.
Advanced Manufacturing Growth Centre (2018b). Building Resilience in Australian
Manufacturing (Sydney: Advanced Manufacturing Growth Centre),
file:///C:/Users/user/Downloads/AMGC_Building-Resilience-in-Australian-
Manufacturing.pdf.
AiGroup (2020). “Toughest Manufacturing Conditions since the Global Financial Crisis,”
May, https://www.aigroup.com.au/resourcecentre/economics/performance-
indicators/PMI/.
Andrews, Dan, Chiara Criscuolo, and Peter Gal (2015). Frontier Firms, Technology
Diffusion and Public Policy: Micro Evidence from OECD Countries (Paris: Organization
for Economic Cooperation and Development),
http://www.oecd.org/economy/growth/Frontier-Firms-Technology-Diffusion-and-
Public-Policy-Micro-Evidence-from-OECD-Countries.pdf.
Audretsch, David, and Erik Lehmann (2016). The Seven Secrets of Germany: Economic
Resilience in an Era of Global Turbulence (Oxford: Oxford University Press).
Carney, Tanya, and Jim Stanford (2018). Advanced Skills for Advanced Manufacturing:
Rebuilding Vocational Training in a Transforming Industry (Canberra: Centre for Future
Work),
https://d3n8a8pro7vhmx.cloudfront.net/theausinstitute/pages/2829/attachments/ori
ginal/1529900135/Advanced_Skills_for_Advanced_Manufacturing_Formatted.pdf?152
9900135.
Chalmers, Shay (2020). “A Strategy to Support a New Era in Australian Manufacturing,”
@AuManufacturing, 21 April, https://www.aumanufacturing.com.au/a-new-deal-for-
manufacturing-a-strategy-to-support-a-new-era-in-australian-manufacturing-by-shay-
chalmers.
A Fair Share for Australian Manufacturing 78
Dept. of Industry, Innovation and Science (2020). Australian Automotive Industry:
Transition Following the End of Australian Motor Vehicle Production (Canberra: Dept.
of Industry, Innovation and Science),
https://www.industry.gov.au/sites/default/files/2020-01/australian-automotive-
industry-transition-following-the-end-of-australian-motor-vehicle-production.pdf.
Diesendorf, M. and B. Elliston (2018). ‘The feasibility of 100% renewable electricity
systems: A response to critics’, Renewable and Sustainable Energy Reviews 93, 318–30.
Graham, P.W., Hayward, J, Foster, J., Story, O. and Havas, L. (2018). GenCost 2018:
Updated Projections of Electricity Generation Technology Costs (Canberra: CSIRO),
https://publications.csiro.au/rpr/download?pid=csiro:EP189502&dsid=DS1.
Green, Roy, et al. (2009). “Management Matters: Just how Productive are We?”,
Report for the Department of Innovation, Industry, Science and Research (Canberra:
Commonwealth of Australia),
www.innovation.gov.au/Industry/ReportsandStudies/Documents/ManagementMatter
sinAustraliaReport.pdf.
Growth Lab at Harvard University (2019). The Atlas of Economic Complexity
(Cambridge: MIT Press), http://www.atlas.cid.harvard.edu.
Howard, John H. (2020). “Manufacturing for a Post-COVID World,”
@AuManufacturing, 13 May, https://www.aumanufacturing.com.au/manufacturing-
for-a-post-covid-world-by-john-h-howard.
Institute for Energy Economics and Financial Analysis (2019). “Australian Consumers
Paying 71% More for Gas on Average than Government Inquiry Says They Should Be
Paying,” 19 October, https://ieefa.org/ieefa-update-australian-consumers-paying-71-
more-for-gas-on-average-than-government-inquiry-says-they-should-be-paying/.
Iacovone, Leonardo, and Gustavo Crespi (2010), “Catching Up with the Technological
Frontier: Micro-level Evidence on Growth and Convergence”, Industrial and Corporate
Change 19(6), pp. 2073-2096.
Koehn, Emma (2019). “'Next step to grow': Morrison pledges $100m business
investment fund,” Sydney Morning Herald, 23 April,
https://www.smh.com.au/business/small-business/next-step-to-grow-morrison-
pledges-100m-business-investment-fund-20190422-p51g7j.html.
KPMG (2019). Australia’s Aerospace Industry Capability Research and Economic
Modelling of the Aircraft Manufacturing and Repair Services Industry in Australia
A Fair Share for Australian Manufacturing 79
(Melbourne: KPMG), https://www.industry.gov.au/sites/default/files/2019-
12/australias-aerospace-industry-capability-report.pdf.
Lanz, Rainer, and Andreas Maurer (2015). “Services and Global Value Chains: Some
Evidence on the Servification of Manufacturing and Services Networks,” World Trade
Organization Economic Research and Statistics Division, Working Paper RSD-2015-03
(Geneva: World Trade Organization),
https://www.wto.org/ENGLISH/res_e/reser_e/ersd201503_e.pdf.
Mazzucato, Mariana (2013). The Entrepreneurial State: Debunking Public vs. Private
Sector Myths (London: Anthem).
McCombie. J.S.L, and Anthony P. Thirlwall, eds. (2014). Essays on Balance of Payments
Constrained Growth: Theory and Evidence (London: Routledge).
Morton, Adam (2020). “Gas ‘completely dominated’ discussion about Covid-19
recovery, commission adviser says,” The Guardian, 13 June,
https://www.theguardian.com/australia-news/2020/jun/13/gas-completely-
dominated-discussion-about-covid-19-recovery-commission-adviser-
says?CMP=Share_iOSApp_Other.
Nahum, Dan (2020). Powering Onwards: Australia’s Opportunity to Reinvigorate
Manufacturing through Renewable Energy (Canberra: Centre for Future Work),
https://d3n8a8pro7vhmx.cloudfront.net/theausinstitute/pages/3311/attachments/ori
ginal/1588894059/Powering-Onwards_FINAL.pdf?1588894059.
Observatory of Economic Complexity (2019). “Economic Complexity Rankings (ECI),”
https://oec.world/en/rankings/country/eci/.
Organization for Economic Cooperation and Development (2020). “Purchasing power
parities,” https://data.oecd.org/conversion/purchasing-power-parities-ppp.htm.
Quicke, Audrey, and Bill Brown (2020). Fossil Fails in the Smart State: Gas and Coal
Power Plant Breakdowns in Victoria (Canberra: Australia Institute), February,
https://www.tai.org.au/sites/default/files/P844%20Fossil%20fails%20in%20the%20Sm
art%20State%20WEB.pdf.
Richardson, David (2019). The Costs of Market Experiments: Electricity Consumers Pay
the Price for Competition, Privatisation, Corporatisation and Marketization (Canberra:
The Australia Institute),
https://www.tai.org.au/sites/default/files/P470%20Electricty%20Consumers%20Pay%
20the%20Price%20[WEB].pdf.
A Fair Share for Australian Manufacturing 80
Rodrik, Dani (2008). “Normalizing Industrial Policy,” Commission on Growth and
Development Working Paper No. 3 (Washington: World Bank),
http://documents.worldbank.org/curated/en/524281468326684286/Normalizing-
industrial-policy.
Sas, Nick (2020). “Australia's manufacturing pivot in a post-coronavirus world as
COVID-19 creates 'new era' for the economy,” ABC News Online, April 18,
https://www.abc.net.au/news/2020-04-19/scott-morrison-government-coronavirus-
covid19-manufacturing/12153568.
Seet, Pi-Shen, Janice Jones, John Spoehr, and Ann-Louise Hordacre (2018). The Fourth
Industrial Revolution: The Implications of Technological Disruption for Australian VET
(Adelaide: National Centre for Vocational Education Research),
https://www.ncver.edu.au/research-and-statistics/publications/all-publications/the-
fourth-industrial-revolution-the-implications-of-technological-disruption-for-
australian-vet.
Shah, Chandra, and Janine Dixon (2018). Future Job Openings for New Entrants by
Industry and Occupation (Adelaide: National Centre for Vocational Education
Research), https://www.ncver.edu.au/research-and-statistics/publications/all-
publications/future-job-openings-for-new-entrants-by-industry-and-occupation.
Simmons, David (2020). “Australian manufacturing bounces back as shoppers
stockpile,” Business News Australia, 1 April,
https://www.businessnewsaus.com.au/articles/australian-manufacturing-bounces-
back-as-shoppers-stockpile.html.
Stanford, Jim (2015). Economics for Everyone: A Short Guide to the Economics of
Capitalism (London: Pluto).
Stanford, Jim (2016). Manufacturing (Still) Matters: Why the Decline of Australian
Manufacturing is Not Inevitable, and What Government Can Do About It (Canberra:
Centre for Future Work),
https://d3n8a8pro7vhmx.cloudfront.net/theausinstitute/pages/536/attachments/origi
nal/1464819264/Manufacturing_Still_Matters___Centre_for_Future_Work.pdf?14648
19264.
Stanford, Jim (2018). Raising the Bar: How Government Can Use its Economic Leverage
to Lift Labour Standards Throughout the Economy (Canberra: Centre for Future Work),
Stanford, Jim, and Tom Swann (2017). Manufacturing: A Moment of Opportunity
(Canberra: Centre for Future Work),
https://d3n8a8pro7vhmx.cloudfront.net/theausinstitute/pages/1503/attachments/ori
A Fair Share for Australian Manufacturing 81
ginal/1497850614/Manufacturing_A_Moment_of_Opportunity_Final_w_cover.pdf?14
97850614.
Stiglitz, Joseph E., Justin Y. Lin, and Celestin Monga (2013). “The Rejuvenation of
Industrial Policy,” World Bank Policy Research Working Paper No. 6628 (Washington:
World Bank), https://openknowledge.worldbank.org/handle/10986/16845.
Workman, Gary (2020). “Manufacturing Will Languish Without Action to Train a Skilled
Australian Workforce,” @AuManufacturing, 29 April,
https://www.aumanufacturing.com.au/a-new-deal-plan-for-manufacturing-
manufacturing-will-languish-without-action-to-train-a-skilled-australian-workforce.
Worrall, Lance (2020). “We Learned We Don’t Have an Industry Policy,”
@AuManufacturing, 11 May, https://www.aumanufacturing.com.au/a-new-deal-plan-
for-manufacturing-we-learned-we-dont-have-an-industry-policy-by-lance-worrall.